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Recursive Smooth Ambiguity Preferences

Abstract

This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in Klibanoff, Marinacci, and Mukerji (2005). A key feature of the model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. In applications one may thus specify/vary these two characteristics independent of each other, thereby facilitating richer comparative statics and modeling flexibility than possible under other models which accomodate ambiguity sensitive preferences. Another key feature is that the preferences are dynamically consistent and have a recursive representation. Therefore techniques of dynamic programming can be applied when using this model.Ambiguity, Uncertainty, Knightian Uncertainty, Ambiguity Aversion, Uncertainty Aversion, Ellsberg Paradox, Dynamic Decision Making, Dynamic Programming under Ambiguity, Smooth Ambiguity.

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