Uncertainty and compound lotteries: calibration

Yoram Halevy; Emre Ozdenoren

doi:https://doi.org/10.1007/s00199-022-01453-1

Uncertainty and compound lotteries: calibration

Yoram Halevy, Emre Ozdenoren

Department of Economics

The Hebrew University of Jerusalem

Research output: Contribution to journal › Article › peer-review

Abstract

This paper introduces a theoretical model of decision making in which preferences are defined on both Savage subjective acts and compound objective lotteries. Preferences are two-stage probabilistically sophisticated when the ranking of acts corresponds to the ranking of the respective compound lotteries induced by the acts through the decision maker’s subjective belief. This family of preferences includes various theoretical models proposed in the literature to accommodate non-neutral attitude towards ambiguity. The principle of calibration relates preferences over acts and compound objective lotteries, and provides a foundation for the tight empirical association between probabilistic sophistication and reduction of compound lotteries for all two-stage probabilistically sophisticated preferences.

Original language	English
Pages (from-to)	373-395
Number of pages	23
Journal	Economic Theory
Volume	74
Issue number	2
DOIs	https://doi.org/10.1007/s00199-022-01453-1
State	Published - Sep 2022

Keywords

Ambiguity
Ellsberg paradox
Knightian uncertainty
Non-expected utility
Two-stage lotteries

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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https://doi.org/10.1007/s00199-022-01453-1

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title = "Uncertainty and compound lotteries: calibration",

abstract = "This paper introduces a theoretical model of decision making in which preferences are defined on both Savage subjective acts and compound objective lotteries. Preferences are two-stage probabilistically sophisticated when the ranking of acts corresponds to the ranking of the respective compound lotteries induced by the acts through the decision maker{\textquoteright}s subjective belief. This family of preferences includes various theoretical models proposed in the literature to accommodate non-neutral attitude towards ambiguity. The principle of calibration relates preferences over acts and compound objective lotteries, and provides a foundation for the tight empirical association between probabilistic sophistication and reduction of compound lotteries for all two-stage probabilistically sophisticated preferences.",

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AB - This paper introduces a theoretical model of decision making in which preferences are defined on both Savage subjective acts and compound objective lotteries. Preferences are two-stage probabilistically sophisticated when the ranking of acts corresponds to the ranking of the respective compound lotteries induced by the acts through the decision maker’s subjective belief. This family of preferences includes various theoretical models proposed in the literature to accommodate non-neutral attitude towards ambiguity. The principle of calibration relates preferences over acts and compound objective lotteries, and provides a foundation for the tight empirical association between probabilistic sophistication and reduction of compound lotteries for all two-stage probabilistically sophisticated preferences.

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KW - Ellsberg paradox

KW - Knightian uncertainty

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EP - 395

JO - Economic Theory

JF - Economic Theory

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ER -

Uncertainty and compound lotteries: calibration

Abstract

Keywords

All Science Journal Classification (ASJC) codes

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