Stochastically independent randomization and uncertainty aversion

Peter Klibanoff*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

Abstract

This paper proposes a preference-based condition for stochastic independence of a randomizing device in a product state space. This condition is applied to investigate some classes of preferences that allow for both independent randomization and uncertainty or ambiguity aversion (a la Ellsberg). For example, when imposed on Choquet Expected Utility (CEU) preferences in a Savage framework displaying uncertainty aversion in the spirit of Schmeidler [27], it results in a collapse to Expected Utility (EU). This shows that CEU preferences that are uncertainty averse in the sense of Schmeidler should not be used in settings where independent randomization is to be allowed. In contrast, Maxmin EU with multiple priors preferences continue to allow for a very wide variety of uncertainty averse preferences when stochastic independence is imposed. Additionally, these points are used to reexamine some recent arguments against preference for randomization with uncertainty averse preferences. In particular, these arguments are shown to rely on preferences that do not treat randomization as a stochastically independent event.

Original languageEnglish (US)
Pages (from-to)605-620
Number of pages16
JournalEconomic Theory
Volume18
Issue number3
DOIs
StatePublished - Jan 1 2001

Keywords

  • Ambiguity aversion
  • Preference for randomization
  • Stochastic independence
  • Uncertainty aversion

ASJC Scopus subject areas

  • Economics and Econometrics

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