## Abstract

Preferences are defined over payoffs that are contingent on a finite number of states representing a horse race (Knightian uncertainty) and a roulette wheel (objective risk). The class of scale-invariant (SI) ambiguity-averse preferences, in a broad sense, is uniquely characterized by a multiple-prior utility representation. Adding a weak certainty-independence axiom is shown to imply either unit coefficient of relative risk aversion (CRRA) toward roulette risk or SI maxmin expected utility. Removing the weak independence axiom but adding a separability assumption on preferences over pure horse-race bets leads to source-dependent constant-relative-risk-aversion expected utility with a higher CRRA assigned to horse-race uncertainty than to roulette risk. The multiple-prior representation in this case is shown to generalize entropic variational preferences. An appendix characterizes the functional forms associated with SI ambiguity-averse preferences in terms of suitable weak independence axioms in place of scale invariance.

Original language | English (US) |
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Pages (from-to) | 59-93 |

Number of pages | 35 |

Journal | Theoretical Economics |

Volume | 8 |

Issue number | 1 |

DOIs | |

State | Published - Jan 2013 |

## Keywords

- Ambiguity aversion
- Homotheticity
- Scale invariance
- Source-dependent risk aversion
- Uncertainty aversion

## ASJC Scopus subject areas

- Economics, Econometrics and Finance(all)