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Ordering Ambiguous Acts

Author

Listed:
  • Sujoy Mukerji

    (Queen Mary University of London)

  • Ian Jewitt

    (Nuffield College, Oxford University)

Abstract

We investigate what it means for one act to be more ambiguous than another. The question is evidently analogous to asking what makes one prospect riskier than another, but beliefs are neither objective nor representable by a unique probability. Our starting point is an abstract class of preferences constructed to be (strictly) partially ordered by a more ambiguity averse relation. First, we define two notions of more ambiguous with respect to such a class. A more ambiguous (I) act makes an ambiguity averse decision maker (DM) worse off but does not affect the welfare of an ambiguity neutral DM. A more ambiguous (II) act adversely affects a more ambiguity averse DM more, as measured by the compensation they require to switch acts. Unlike more ambiguous (I), more ambiguous (II) does not require indifference of ambiguity neutral elements to the acts being compared. Second, we implement the abstract definitions to characterize more ambiguous (I) and (II) for two explicit preference families: a maxmin expected utility and smooth ambiguity. Thirdly, we give applications to the comparative statics of more ambiguous in a standard portfolio problem and a consumption-saving problem.

Suggested Citation

  • Sujoy Mukerji & Ian Jewitt, 2017. "Ordering Ambiguous Acts," Working Papers 828, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:828
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    More about this item

    Keywords

    Ambiguity; Uncertainty; Knightian Uncertainty; Ambiguity Aversion; Uncertainty aversion; Ellsberg paradox; Comparative statics; Single-crossing; More ambiguous; Portfolio choice;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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