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Source Theory : A Tractable and Positive Ambiguity Theory

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  • Aurélien Baillon

    (EM - EMLyon Business School, GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - EM - EMLyon Business School - CNRS - Centre National de la Recherche Scientifique)

  • Han Bleichrodt

    (Universidad de Alicante)

  • Chen Li

    (Erasmus University Rotterdam)

  • Peter P. Wakker

    (Erasmus University Rotterdam)

Abstract

This paper introduces source theory, a new theory for decision under ambiguity (unknown probabilities). It shows how Savage's subjective probabilities, with source-dependent nonlinear weighting functions, can model Ellsberg's ambiguity. It can do so in Savage's framework of state-contingent assets, permits nonexpected utility for risk, and avoids multistage complications. It is tractable, shows ambiguity attitudes through simple graphs, is empirically realistic, and can be used prescriptively. We provide a new tool to analyze weighting functions: pmatchers. They give Arrow–Pratt-like transformations but operate "within" rather than "outside" functions. We further show that ambiguity perception and inverse S probability weighting, seemingly unrelated concepts, are two sides of the same "insensitivity" coin.

Suggested Citation

  • Aurélien Baillon & Han Bleichrodt & Chen Li & Peter P. Wakker, 2025. "Source Theory : A Tractable and Positive Ambiguity Theory," Post-Print hal-04964898, HAL.
    • Handle: RePEc:hal:journl:hal-04964898
    DOI: 10.1287/mnsc.2023.03307
    Note: View the original document on HAL open archive server: https://hal.science/hal-04964898v1
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    Keywords

    subjective beliefs; ambiguity aversion; Ellsberg paradox; source of uncertainty;
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