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On Risk and Uncertainty, and Objective versus Subjective Probability

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  • Keiran Sharpe

Abstract

In this paper, we use the algebra R×R to characterise decision†makers’ representations of risk and uncertainty. We show that risk can be represented by objective probabilities on one part of the algebra, and that uncertainty can be represented by subjective probabilities on the other part. Decision†makers are shown to maximise a generalised form of rank†dependent expected utility. Their occasionally anomalous behaviour is discussed.

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  • Keiran Sharpe, 2018. "On Risk and Uncertainty, and Objective versus Subjective Probability," The Economic Record, The Economic Society of Australia, vol. 94(S1), pages 49-72, June.
    • Handle: RePEc:bla:ecorec:v:94:y:2018:i:s1:p:49-72
    DOI: 10.1111/1475-4932.12403
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    References listed on IDEAS

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    1. Yehuda Izhakian & Zur Izhakian, 2015. "Decision making in phantom spaces," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 59-98, January.
    2. Gajdos, T. & Hayashi, T. & Tallon, J.-M. & Vergnaud, J.-C., 2008. "Attitude toward imprecise information," Journal of Economic Theory, Elsevier, vol. 140(1), pages 27-65, May.
    3. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    4. Chateauneuf, Alain & Jaffray, Jean-Yves, 1989. "Some characterizations of lower probabilities and other monotone capacities through the use of Mobius inversion," Mathematical Social Sciences, Elsevier, vol. 17(3), pages 263-283, June.
    5. Feduzi, Alberto, 2007. "On the relationship between Keynes's conception of evidential weight and the Ellsberg paradox," Journal of Economic Psychology, Elsevier, vol. 28(5), pages 545-565, October.
    6. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
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    Cited by:

    1. Zheng Li, 2020. "Experimental Evidence on Socioeconomic Differences in Risk‐Taking and Risk Premiums," The Economic Record, The Economic Society of Australia, vol. 96(313), pages 140-152, June.
    2. M. O. Kuznetsova, 2022. "Approaches To Managing Innovative Risks Of Industrial Companies," Strategic decisions and risk management, Real Economy Publishing House, vol. 12(4).

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