An axiomatic approach to \(\boldsymbol{\varepsilon}\)-contamination

Suppose that an economic agent is \((1-\varepsilon) \times\)100% certain that uncertainty she faces is characterized by a particular probability measure, but that she has a fear that, with \(\varepsilon \times\)100% chance, her conviction is completely wrong and she is left perfectly ignorant about the true measure in the present as well as in the future. This situation is often called “\(\varepsilon\)-contamination of confidence.” The purpose of this paper is to provide a simple set of behavioral axioms under which the decision-maker’s preference is represented by the Choquet expected utility with the \(\varepsilon\)-contamination of confidence.

Authors and Affiliations

1. Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Tokyo 113-0033, Bunkyo-ku, JAPAN

   Kiyohiko G. Nishimura

2. Faculty of Economics, Tohoku University, Sendai 980-8576, Kawauchi, Aoba-ku, JAPAN

   Hiroyuki Ozaki

Corresponding author

Correspondence to Hiroyuki Ozaki.

Received: 25 November 2002, Revised: 15 November 2004,

JEL Classification Numbers:

D81.

Correspondence to: Hiroyuki Ozaki

We are grateful to an anonymous referee. The referee’s comments greatly improved the exposition of the paper. The work reported here is partially supported by a grant from the Economic and Social Research Insitute, the Cabinet Office, the Government of Japan.

Reprints and permissions