A Framework That Allows For Ambiguity Preferences
Smooth ambiguity preferences are represented as:
- s ∈ S set of contingencies or states
- πθ is a probability distribution over S
- f is an “act” yielding state contingent payoffs f (s)
- u is a von Neumann-Morgenstern utility function and represents risk attitude
- φ maps expected utilities and represents ambiguity attitude
- Ambiguity attitude is summarized using measure similar to absolute risk aversion, only absolute ambiguity aversion:
- μ is a subjective probability over θ ∈ Θ; Represents the ambiguous belief – it summarizes the decision-maker’s subjective uncertainty about the “true” πθ, probability distribution over contingencies. (Collar, 2008)
Read more about this topic: Ambiguity Aversion
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