Uncertainty Averse Preferences

We study uncertainty averse preferences, that is, complete and transitive preferences that are convex and monotone. We establish a representation result, which is at same time general and rich in structure. Many objective functions commonly used in applications are special cases of this representation.ambiguity aversion, games against nature, model uncertainty, smooth ambiguity preferences, variational preferences

Probabilistic Sophistication, Second Order Stochastic Dominance, and Uncertainty Aversion

We study the interplay of probabilistic sophistication, second order stochastic dominance, and uncertainty aversion, three fundamental notions in choice under uncertainty. In particular, our main result, Theorem 2, characterizes uncertainty averse preferences that satisfy second order stochastic dominance, as well as uncertainty averse preferences that are probabilistically sophisticated.Probabilistic Sophistication; Second Order Stochastic Dominance; Uncertainty Aversion; Unambiguous Events; Subjective Expected Utility

The role of role uncertainty in modified dictator games

We compare behavior in modified dictator games with and without role uncertainty. Subjects choose between a selfish action, a costly surplus creating action (altruistic behavior) and a costly surplus destroying action (spiteful behavior). While costly surplus creating actions are the most frequent under role uncertainty (64%), selfish actions become the most frequent without role uncertainty (69%). Also, the frequency of surplus destroying choices is negligible with role uncertainty (1%) but not so without it (11%). A classification of subjects into four different types of interdependent preferences (Selfish, Social Welfare maximizing, Inequity Averse and Competitive) shows that the use of role uncertainty overestimates the prevalence of Social Welfare maximizing preferences in the subject population (from 74% with role uncertainty to 21% without it) and underestimates Selfish and Inequity Averse preferences. An additional treatment, in which subjects undertake an understanding test before participating in the experiment with role uncertainty, shows that the vast majority of subjects (93%) correctly understand the payoff mechanism with role uncertainty, but yet surplus creating actions were most frequent. Our results warn against the use of role uncertainty in experiments that aim to measure the prevalence of interdependent preferences.Role uncertainty, role reversal, interdependent preferences, social welfare, maximizing, inequity aversion, mixture-of-types models, strategy method, experiments., leex

Uncertainty aversion and preference for randomization

Individuals exhibit preferences for randomization if they prefer random mixtures of two bets to each of the involved bets. Such preferences underpin various models of uncertainty aversion. However, it has to our knowledge not been empirically investigated whether uncertainty-averse decision makers indeed exhibit such preferences. Here, we examine the relationship experimentally. We find that uncertainty aversion is not positively associated with preferences for randomization. Moreover, we observe a puzzling behavior that is not predicted: a non-negligible number of uncertain-averse subjects seem to dislike randomization

Attitudes towards Uncertainty and Randomization: An Experimental Study

Individuals exhibit a randomization preference if they prefer random mixtures of two bets to each of the involved bets. Such preferences provide the foundation of various models of uncertainty aversion. However, it has to our knowledge not been empirically investigated whether uncertainty-averse decision makers indeed exhibit such preferences. Here, we examine the relationship experimentally. We find that uncertainty aversion is not positively associated with randomization preferences. Moreover, we observe choices that are not consistent with the prevailing theories of uncertainty aversion: a non-negligible number of uncertain-averse subjects seem to dislike randomization

Indifference pricing with uncertainty averse preferences

In this dissertation we study the indifference buyer's price and the indifference seller's price of an uncertainty averse decision-maker and the characterization of a decision maker's attitudes toward uncertainty. In the first part of the dissertation we study the properties fulfilled by the indifference buyer's price and by the indifference seller's price of an uncer- tainty averse decision-maker. We find that the indifference buyer's price is a quasiconvex risk measure and that the indifference seller's price is a cash-additive convex risk measure. We identify the acceptance family of the indifference buyer's price as well as the acceptance set of the indifference seller's price. We characterize the dual representations of the indifference buyer's price and of the indifference seller's price both in terms of probabil- ity charges and in terms of probability measures. In the second part of the dissertation we study the characterization of a decision-maker's attitudes toward uncertainty in terms of the indifference buyer's price and of the indifference seller's price. We find that a decision- maker is more uncertainty averse than another if and only if her indifference buyer's price and her indifference seller's price are larger than for the other. We find that a decision-maker is increasingly (respectively, decreasingly, con- stantly) uncertainty averse if and only if her indifference buyer's price and her indifference seller's price are increasing (respectively, decreasing, con- stant) functions of her constant initial wealth. In the last part of the dissertation we further develop the characterization of increasing, decreasing, and constant uncertainty aversion and we derive a technical condition that allows to immediately verify whether an uncer- tainty averse representation of preferences exhibits increasing, decreasing, or constant uncertainty aversion. We find that this technical condition allows 6to classify a large class of uncertainty averse representations of preferences into increasingly, decreasingly, and constantly uncertainty averse

Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior

Experimental evidence suggests that individuals are more risk averse when they perceive risk gradually. We address these findings by studying a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time. DM has preferences for one-shot resolution of uncertainty if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic preferences for one-shot resolution of uncertainty and static preferences that are identified with the behavior observed in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, preferences for one-shot resolution of uncertainty capture narrow framing.

No-arbitrage, overlapping sets of priors and the existence of efficient allocations and equilibria in the presence of risk and ambiguity

The theory of existence of equilibrium with short-selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences. A sufficient condition for existence of efficient allocations is that the relative interiors of the risk adjusted sets of expectations overlap. This condition is necessary if agents are not risk neutral at extreme levels of wealths either positive or negative. It is equivalent to the condition that there does not exist mutually compatible trades, with non negative expected value with respect to any risk adjusted prior, strictly positive for some agent and some prior. It is shown that the more uncertainty averse and the more risk averse, the more likely are efficient allocations and equilibria to exist.Uncertainty, risk, common prior, equilibria with short-selling, variational preferences.

Overlapping risk adjusted sets of priors and the existence of efficient allocations and equilibria with short-selling

The theory of existence of equilibrium with short-selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences. A sufficient condition for existence of efficient allocations is that the relative interiors of the risk adjusted sets of expectations overlap. This condition is necessary if agents are not risk neutral at extreme levels of wealths either positive or negative. It is equivalent to the condition that there does not exist mutually compatible trades, with non negative expected value with respect to any risk adjusted prior, strictly positive for some agent and some prior. It is shown that the more uncertainty averse and the more risk averse the agents, the more likely are efficient allocations and equilibria to exist.Uncertainty;risk;common prior;equilibria with shortselling;Variational preferences

Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior, Second Version

Experimental evidence suggests that individuals are more risk averse when they perceive risk that is gradually resolved over time. We address these findings by studying a decision maker (DM) who has recursive, non-expected utility preferences over compound lotteries. DM has preferences for one-shot resolution of uncertainty (PORU) if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic PORU and static preferences that are identified with commonly observed behavior in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, PORU captures “loss aversion with narrow framing.”Recursive preferences over compound lotteries, resolution of uncertainty, Allais paradox, narrow framing, negative certainty independence