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Ambiguity Models and the Machina Paradoxes
Journal article   Peer reviewed

Ambiguity Models and the Machina Paradoxes

Aurelien Baillon, Olivier L'Haridon and Laetitia Placido
American Economic Review, Vol.101(4), pp.1547-1560
01/06/2011

Abstract

Ambiguity Machina Economics
Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results.

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6 Social Sciences
6.122 Economic Theory
6.122.1287 Risk and Uncertainty
Web of Science research areas
Economics
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