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SECOND INTERNATIONAL
SYMPOSIUM ON

IMPRECISE PROBABILITIES AND THEIR APPLICATIONS

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Cornell University

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Ithaca, NY, USA

26 - 29 June 2001

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ELECTRONIC PROCEEDINGS

# Uncertainty aversion with second-order probabilities and utilities

### Abstract

Aversion to uncertainty is commonly attributed to non-additivity of
subjective probabilities for ambiguous events, as in the Choquet
expected utility model. This paper shows that uncertainty aversion can
be parsimoniously explained by a simple model of ?partially separable?
non-expected utility preferences in which the decision maker satisfies
the independence axiom selectively within partitions of the state space
whose elements have similar degrees of uncertainty. As such, she may
behave like an expected-utility maximizer with additive probabilities
for assets in the same uncertainty class, while exhibiting higher
degrees of risk aversion toward assets that are more uncertain. An
alternative interpretation of the same model is that the decision maker
may be uncertain about her credal state (represented by second-order
probabilities for her first-order probabilities and utilities), and she
may be averse to that uncertainty (represented by a second-order utility
function). The Ellsberg and Allais paradoxes are explained by way of
illustration.

** Keywords. ** risk aversion, uncertainty aversion, non-additive probabilities, risk neutral probabilities

** Format. **PDF

**Paper Download **

The paper is availabe in the following sites:

** Authors addresses: **

Fuqua School of Business

Duke University

Durham, NC 27708-0120

USA

** E-mail addresses: **

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