A Smooth Model Of Decision Making Under Ambiguity

Topics:
Decision making
Tags:
Ambiguity,
Decision-making,
Management,
Model,
Northwestern University,
Tools & Techniques
Source:
Northwestern University

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Overview: This paper presents a smooth model of decision making. One advantage of this model is that the well-developed machinery for dealing with risk attitudes can be applied as well to ambiguity attitudes. The model is also distinct from many in the literature on ambiguity in that allows smooth, rather than kinked, indifference curves. This leads to different behavior and improved tractability, while still sharing the main features. The Maxmin EU model (e.g., Gilboa and Schmeidler (1989)) with a given set of measures may be seen as an extreme case of the model with infinite ambiguity aversion. Two illustrative applications to portfolio choice are offered.

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Format: PDF | Size: 1,075KB | Date: Apr 2003 | Pages: 54

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