Recursive smooth ambiguity preferences

This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in Klibanoff, Marinacci, and Mukerji (2005). A key feature of the model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. In applications one may thus specify/vary these two characteristics independent of each other, thereby facilitating richer comparative statics and modeling flexibility than possible under other models which accomodate ambiguity sensitive preferences. Another key feature is that the preferences are dynamically consistent and have a recursive representation. Therefore techniques of dynamic programming can be applied when using this model.

[1]  Tan Wang,et al.  Conditional preferences and updating , 2003, J. Econ. Theory.

[2]  Luigi Montrucchio,et al.  Refinement Derivatives and Values of Games , 2008, Math. Oper. Res..

[3]  P. Wakker.  Additive Representations of Preferences: A New Foundation of Decision Analysis , 1988 .

[4]  Larry G. Epstein,et al.  Dynamically Consistent Beliefs Must Be Bayesian , 1993 .

[5]  Daniela Del Boca,et al.  Household Time Allocation and Modes of Behavior: A Theory of Sorts , 2005, SSRN Electronic Journal.

[6]  William S. Neilson.  Ambiguity Aversion: An Axiomatic Approach Using Second Order Probabilities , 1993 .

[7]  D. Schmeidler,et al.  A More Robust Definition of Subjective Probability , 1992 .

[8]  Peter P. Wakker,et al.  Additive Representations of Preferences , 1989 .

[9]  Pietro Garibaldi,et al.  Hiring Freeze and Bankruptcy in Unemployment Dynamics , 2006, SSRN Electronic Journal.

[10]  Stephen G. Walker,et al.  BAYESIAN CONSISTENCY FOR STATIONARY MODELS , 2007, Econometric Theory.

[11]  Daniela Del Boca,et al.  Modes of Spousal Interaction and the Labor Market Environment , 2006 .

[12]  Kyoungwon Seo,et al.  AMBIGUITY AND SECOND-ORDER BELIEF , 2009 .

[13]  Lars Peter Hansen,et al.  Recursive Robust Estimation and Control Without Commitment , 2007, J. Econ. Theory.

[14]  Massimo Marinacci,et al.  A strong law of large numbers for capacities , 2005 .

[15]  Massimo Marinacci,et al.  Cores of non-atomic market games , 2006, Int. J. Game Theory.

[16]  Peter Klibanoff,et al.  Updating Ambiguity Averse Preferences , 2009 .

[17]  Kiyohiko G. Nishimura,et al.  A Simple Axiomatization of Iterated Choquet Objectives , 2003 .

[18]  Bryan R. Routledge,et al.  Exotic Preferences for Macroeconomists , 2004, NBER Macroeconomics Annual.

[19]  Qi Zeng,et al.  Equilibrium Stock Return Dynamics Under Alternative Rules of Learning About Hidden States , 2003 .

[20]  Joseph J. Launie,et al.  Uncertain Decisions: Bridging Theory and Experiments , 2000 .

[21]  Larry G. Epstein.  Stationary cardinal utility and optimal growth under uncertainty , 1983 .

[22]  Zvi Eckstein,et al.  From Farmers to Merchants, Voluntary Conversions and Diaspora: A Human Capital Interpretation of Jewish History , 2006 .

[23]  Larry G. Epstein,et al.  Ambiguity, risk, and asset returns in continuous time , 2000 .

[24]  L. Hansen,et al.  Beliefs, Doubts and Learning: Valuing Economic Risk , 2007 .

[25]  James D. Hamilton.  A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle , 1989 .

[26]  Kathryn Fraughnaugh,et al.  Introduction to graph theory , 1973, Mathematical Gazette.

[27]  Christian Gollier,et al.  Does ambiguity aversion reinforce risk aversion? Applications to portfolio choices and asset pricing , 2005 .

[28]  M. Marinacci,et al.  A Smooth Model of Decision Making Under Ambiguity , 2003 .

[29]  Uzi Segal,et al.  The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach , 1987 .

[30]  M. Machina.  Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty , 1989 .

[31]  Evan L. Porteus,et al.  Temporal Resolution of Uncertainty and Dynamic Choice Theory , 1978 .

[32]  Massimo Marinacci,et al.  On Concavity and Supermodularity , 2008 .

[33]  R. Durrett.  Probability: Theory and Examples , 1993 .

[34]  D. Schmeidler.  Subjective Probability and Expected Utility without Additivity , 1989 .

[35]  Eran Hanany,et al.  Updating Preferences with Multiple Priors , 2006 .

[36]  Pietro Garibaldi , 2006 .

[37]  I. Gilboa,et al.  Maxmin Expected Utility with Non-Unique Prior , 1989 .

[38]  R. Lucas.  ASSET PRICES IN AN EXCHANGE ECONOMY , 1978 .

[39]  Paolo Ghirardato,et al.  Revisiting Savage in a conditional world , 2002 .

[40]  Andrew B. Abel,et al.  Asset Prices Under Habit Formation and Catching Up with the Joneses , 1990 .

[41]  Massimo Marinacci,et al.  Unique Solutions of Some Recursive Equations in Economic Dynamics , 2007 .

[42]  Martin Schneider,et al.  IID: independently and indistinguishably distributed , 2003, J. Econ. Theory.

[43]  Robert F. Nau,et al.  Uncertainty Aversion with Second-Order Utilities and Probabilities , 2006, Manag. Sci..

[44]  Massimo Marinacci,et al.  PORTFOLIO SELECTION WITH MONOTONE MEAN‐VARIANCE PREFERENCES , 2009 .

[45]  Martin Schneider,et al.  Recursive multiple-priors , 2003, J. Econ. Theory.

[46]  Massimo Marinacci,et al.  COARSE CONTINGENCIES , 2005 .

[47]  A. Rustichini,et al.  Ambiguity Aversion, Robustness, and the Variational Representation of Preferences , 2006 .

[48]  R. H. Strotz.  Myopia and Inconsistency in Dynamic Utility Maximization , 1955 .

[49]  Jianjun Miao,et al.  A Note on Consumption and Savings under Knightian Uncertainty , 2004 .

[50]  Massimo Marinacci,et al.  Dynamic variational preferences , 2006, J. Econ. Theory.

[51]  Edi Karni,et al.  Atemporal dynamic consistency and expected utility theory , 1991 .

[52]  Colin Camerer.  Ambiguity-Aversion and Non-Additive Probability: , 1999 .

[53]  T. Sargent,et al.  Robust Control and Model Uncertainty , 2001 .

[54]  Larry G. Epstein,et al.  Intertemporal Asset Pricing Under Knightian Uncertainty , 1994 .

[55]  Massimo Marinacci,et al.  Unique solutions for stochastic recursive utilities , 2010, J. Econ. Theory.

[56]  Haluk Ergin,et al.  A subjective theory of compound lotteries , 2003 .

[57]  Diego García,et al.  Overconfidence and Market Efficiency with Heterogeneous Agents , 2005 .

[58]  Larry G. Epstein,et al.  Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework , 1989 .

[59]  David Kelsey,et al.  CEU preferences and dynamic consistency , 2005, Math. Soc. Sci..

[60]  Marco Scarsini,et al.  Large newsvendor games , 2007, Games Econ. Behav..

[61]  Jianjun Miao,et al.  Ambiguity, Learning, and Asset Returns , 2009 .

[62]  John B. Donaldson,et al.  The Structure of Intertemporal Preferences under Uncertainty and Time Consistent Plans , 1985 .

[63]  Zvi Eckstein,et al.  Path Dependence and Occupations , 2006 .

[64]  Takashi Hayashi,et al.  Intertemporal substitution, risk aversion and ambiguity aversion , 2005 .

[65]  P. Wakker,et al.  Dynamic Choice and NonExpected Utility , 1998 .

[66]  Marciano M. Siniscalchi,et al.  Dynamic Choice Under Ambiguity , 2006 .

[67]  A. Tarski.  A LATTICE-THEORETICAL FIXPOINT THEOREM AND ITS APPLICATIONS , 1955 .

[68]  A. Buffa,et al.  Should Insider Trading be Prohibited when Share Repurchases are Allowed , 2006 .

[69]  Larry Wasserman,et al.  Dilation for Sets of Probabilities , 1993 .

[70]  Robert A. Pollak,et al.  Habit Formation and Dynamic Demand Functions , 1970, Journal of Political Economy.