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Second-Order Representations: A Bayesian Approach

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  • Ozgur Evren

    (New Economic School)

Abstract

For choice problems under ambiguity, I provide a behavioral characterization of a decision maker who holds a second-order belief and updates it in a Bayesian fashion in response to new information concerning the true distribution of the states. The model features a unique second-order belief that can be elicited from choice data and is quite comprehensive in terms of ambiguity attitudes and risk preferences. Special versions, such as the smooth ambiguity model or the recursive non-expected utilitymodel, are easily characterized by additional assumptions on compound-risk preferences. Thereby, the model provides a testing ground to compare and contrast these well-known representations as well as alternative specifications that may be of interest. To illustrate potential benefits of alternative specifications, I provide a detailed analysis of a rank-dependent extension of the smooth ambiguity model.

Suggested Citation

  • Ozgur Evren, 2024. "Second-Order Representations: A Bayesian Approach," Working Papers w0291, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0291
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    File URL: https://www.nes.ru/files/Preprints-resh/WP291.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Ambiguity Aversion and Seeking; Ellsberg Paradox; Second-Order Belief; Probabilistic Sophistication; Bayesian Updating; Compound Risk JEL Classifications: D81; D83;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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