A Paradox for the “Smooth Ambiguity” Model of Preference

Authors

  • Larry G. Epstein

    1. Dept. of Economics, Boston University, 270 Bay State Road, Boston, MA 02215, U.S.A.; lepstein@bu.edu
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    • 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.”


Abstract

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.

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