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Confidence and ambiguity

Author

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  • Brian Hill

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper proposes a model of the decision-maker's confidence in his probability judgements, in terms of an implausibility measure – a real-valued function on the set of probability functions. A decision rule is axiomatised according to which the decision-maker evaluates acts using sets of probability functions which vary depending on the agent's implausibility measure and on what is at stake in the choice of the act. The framework proposed yields a natural notion of comparative aversion to lack of confidence, or ambiguity aversion, and allows the definition of an ambiguity premium. It is shown that these notions are equivalent and can be characterised in terms of the implausibility measure representing the agent's confidence. A simple portfolio example is presented.

Suggested Citation

  • Brian Hill, 2009. "Confidence and ambiguity," Working Papers hal-00489870, HAL.
    • Handle: RePEc:hal:wpaper:hal-00489870
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    References listed on IDEAS

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    Cited by:

    1. Brian Hill, 2012. "Confidence in preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 39(2), pages 273-302, July.

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    More about this item

    Keywords

    Confidence; multiple priors; ambiguity aversion; ambiguity premium; implausibility measure;
    All these keywords.

    JEL classification:

    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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