This research was supported by a grant from the National Science Foundation (Award SES-0917740). I am grateful to Andrew Ellis, Yoram Halevy, Peter Klibanoff, Asen Kochov, Bart Lipman, Mark Machina, Wolfgang Pesendorfer, Martin Schneider, Uzi Segal, Kyoungwon Seo, Peter Wakker, and especially Bob Nau for helpful comments and discussions. This paper was previously titled “Three Paradoxes for the ‘Smooth Ambiguity’ Model of Preference.”
A Paradox for the “Smooth Ambiguity” Model of Preference
Article first published online: 3 DEC 2010
© 2010 The Econometric Society
Volume 78, Issue 6, pages 2085–2099, November 2010
How to Cite
Epstein, L. G. (2010), A Paradox for the “Smooth Ambiguity” Model of Preference. Econometrica, 78: 2085–2099. doi: 10.3982/ECTA8689
- Issue published online: 3 DEC 2010
- Article first published online: 3 DEC 2010
- Manuscript received July, 2009; final revision received July, 2010.
- calibrating ambiguity aversion;
- multiple priors;
- smooth ambiguity model of preference;
- separation of ambiguity from ambiguity aversion
Two Ellsberg-style thought experiments are described that reflect on the smooth ambiguity decision model developed by Klibanoff, Marinacci, and Mukerji (2005). The first experiment poses difficulties for the model's axiomatic foundations and, as a result, also for its interpretation, particularly for the claim that the model achieves a separation between ambiguity and the attitude toward ambiguity. Given the problematic nature of its foundations, the behavioral content of the model and how it differs from multiple priors, for example, are not clear. The second thought experiment casts some light on these questions.