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Ambiguity aversion, risk aversion, and the weight of evidence

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  • Edi Karni

    (Johns Hopkins University)

Abstract

Wakker (Theory Decis 29:119–132, 1990) proved that the rank-dependent utility model is a special case of Choquet expected utility model. Invoking this result and applying the certainty equivalent reduction procedure, this paper shows that risk aversion in the rank-dependent utility model implies ambiguity aversion in the corresponding Choquet expected utility model. Consequently, the pattern of choice depicted by Ellsberg’s experiments and, more generally, preference for evidence to support their beliefs is an expression of decision makers’ risk aversion. In addition, the paper introduces a new procedure of updating capacities by the application of Bayes rule that smooth ambiguity aversion may also be regarded as risk aversion.

Suggested Citation

  • Edi Karni, 2024. "Ambiguity aversion, risk aversion, and the weight of evidence," Theory and Decision, Springer, vol. 97(4), pages 595-611, December.
    • Handle: RePEc:kap:theord:v:97:y:2024:i:4:d:10.1007_s11238-024-09995-7
    DOI: 10.1007/s11238-024-09995-7
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    References listed on IDEAS

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