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Definitions of Ambiguous Events and the Smooth Ambiguity Model, Economic Theory

Abstract

We examine a variety of preference-based definitions of ambiguous events in the context of the smooth ambiguity model. We first consider the definition proposed in Klibanoff, Marinacci, and Mukerji (2005) based on the classic Ellsberg two-urn paradox (Ellsberg (1961)), and show that it satisfies several desirable properties. We then compare this definition with those of Nehring (1999), Epstein and Zhang (2001), Zhang (2002) and Ghirardato and Marinacci (2002). Within the smooth ambiguity model, we show that Ghirardato and Marinacci (2002) would identify the same set of ambiguous and unambiguous events as our definition while Epstein and Zhang (2001) and Zhang (2002) would yield a different classification. Moreover, we discuss and formally identify two key sources of the differences compared to Epstein and Zhang (2001) and Zhang (2002). The more interesting source is that these two definitions can confound non-constant ambiguity attitude and the ambiguity of an event.

Type

Article

Author(s)

Peter Klibanoff, Massimo Marinacci, Sujoy Mukerji

Date Published

2011

Citations

Klibanoff, Peter, Massimo Marinacci, and Sujoy Mukerji. 2011. Definitions of Ambiguous Events and the Smooth Ambiguity Model. Economic Theory. 48(2-3): 399-424.

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