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Revisiting Ellsberg’s and Machina’s Paradoxes : A Two-Stage Evaluation Model Under Ambiguity

In this paper, a two-stage evaluation (TSE) model for decision making under ambiguity is proposed. Events in state space are classified into risky and ambiguous events, which correspond to different types of uncertainty generated by different sources. In this TSE model, uncertainty of two different types are evaluated by decision maker (DM) in different stages. In the first stage, DM evaluates more uncertain consequences of an act locally by applying local subjective expected utility (SEU) models, which are then embedded into the second-stage evaluation based on SEU defined globally over all events. To axiomatize such a model, the small domain SEU over risky acts is extended to both risky and nonrisky (ambiguous) acts. When evaluating a risky act, TSE model reduces to Savage’s SEU with one stage. When evaluating an ambiguous act, local SEU with a different uncertainty aversion defined on ambiguous events gives TSE model some flexibility in describing preferences. It can be shown that TSE model can accommodate Ellsberg’s paradoxes and Machina’s paradoxes in the literature. When applied to portfolio selection problem, TSE model enjoys some nice properties other models do not have.

Ketersediaan

Informasi Detail

Judul Seri

MANAGEMENT SCIENCE; Vol.67 No.11 November 2021

No. Panggil

-

Penerbit

: .,

Deskripsi Fisik

p. 6897 - 6914

Bahasa

English

ISBN/ISSN

-

Klasifikasi

NONE

Tipe Isi

-

Tipe Media

-

Tipe Pembawa

-

Edisi

-

Subjek

AMBIGUITY
PORTFOLIO SELECTION
ELLSBERG PARADOX
MACHINA PARADOX
SMALL DOMAINS
TWO-STAGE
SOURCE DEPENDENT
MYOPIC UTILITY

Info Detail Spesifik

https://doi.org/10.1287/mnsc.2020.3835

Pernyataan Tanggungjawab

Ying He

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