scholarly journals Probabilistic sophistication and variational preferences

2011 ◽  
Vol 146 (5) ◽  
pp. 2117-2125 ◽  
Author(s):  
Tomasz Strzalecki
Keyword(s):  
Variational Preferences

Ambiguity Models and the Machina Paradoxes

2011 ◽  
Vol 101 (4) ◽  
pp. 1547-1560 ◽  
Author(s):  
AurÉlien Baillon ◽  
Olivier L'Haridon ◽  
Laetitia Placido
Keyword(s):  
Expected Utility ◽  
Ambiguity Aversion ◽  
Choquet Expected Utility ◽  
Maxmin Expected Utility ◽  
Alternative Representation ◽  
Smooth Model ◽  
Variational Preferences

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. (JEL D81)

Decision Making Under Model Uncertainty: Fréchet–Wasserstein Mean Preferences

2021 ◽  
Author(s):  
Electra V. Petracou ◽  
Anastasios Xepapadeas ◽  
Athanasios N. Yannacopoulos
Keyword(s):  
Decision Making ◽  
Model Uncertainty ◽  
Ambiguity Aversion ◽  
Decision Makers ◽  
Social Discount Rate ◽  
Wasserstein Metric ◽  
Probability Models ◽  
The Social ◽  
The Given ◽  
Variational Preferences

This paper contributes to the literature on decision making under multiple probability models by studying a class of variational preferences. These preferences are defined in terms of Fréchet mean utility functionals, which are based on the Wasserstein metric in the space of probability models. In order to produce a measure that is the “closest” to all probability models in the given set, we find the barycenter of the set. We derive explicit expressions for the Fréchet–Wasserstein mean utility functionals and show that they can be expressed in terms of an expansion that provides a tractable link between risk aversion and ambiguity aversion. The proposed utility functionals are illustrated in terms of two applications. The first application allows us to define the social discount rate under model uncertainty. In the second application, the functionals are used in risk securitization. The barycenter in this case can be interpreted as the model that maximizes the probability that different decision makers will agree on, which could be useful for designing and pricing a catastrophe bond. This paper was accepted by Manel Baucells, decision analysis.

scholarly journals Dynamic variational preferences

2006 ◽  
Vol 128 (1) ◽  
pp. 4-44 ◽  
Author(s):  
Fabio Maccheroni ◽  
Massimo Marinacci ◽  
Aldo Rustichini
Keyword(s):  
Variational Preferences

Robust Decision Theory and Econometrics

2020 ◽  
Vol 12 (1) ◽  
pp. 239-271 ◽  
Author(s):  
Gary Chamberlain
Keyword(s):  
Decision Theory ◽  
Portfolio Choice ◽  
Expected Utility ◽  
Empirical Work ◽  
Decision Problems ◽  
Maxmin Expected Utility ◽  
The Empirical Analysis ◽  
Variational Preferences ◽  
Constraint Preferences ◽  
Period Model

This review uses the empirical analysis of portfolio choice to illustrate econometric issues that arise in decision problems. Subjective expected utility (SEU) can provide normative guidance to an investor making a portfolio choice. The investor, however, may have doubts on the specification of the distribution and may seek a decision theory that is less sensitive to the specification. I consider three such theories: maxmin expected utility, variational preferences (including multiplier and divergence preferences and the associated constraint preferences), and smooth ambiguity preferences. I use a simple two-period model to illustrate their application. Normative empirical work on portfolio choice is mainly in the SEU framework, and bringing in ideas from robust decision theory may be fruitful.

COMPOSITION OF TIME-CONSISTENT DYNAMIC MONETARY RISK MEASURES IN DISCRETE TIME

2011 ◽  
Vol 14 (01) ◽  
pp. 137-162 ◽  
Author(s):  
PATRICK CHERIDITO ◽  
MICHAEL KUPPER
Keyword(s):  
Stochastic Processes ◽  
Discrete Time ◽  
Risk Measures ◽  
Risk Measure ◽  
Cash Flows ◽  
Penalty Functions ◽  
Future Time ◽  
Dual Representation ◽  
One Step ◽  
Variational Preferences

In discrete time, every time-consistent dynamic monetary risk measure can be written as a composition of one-step risk measures. We exploit this structure to give new dual representation results for time-consistent convex monetary risk measures in terms of one-step penalty functions. We first study risk measures for random variables modelling financial positions at a fixed future time. Then we consider the more general case of risk measures that depend on stochastic processes describing the evolution of financial positions or cumulated cash flows. In both cases the new representations allow for a simple composition of one-step risk measures in the dual. We discuss several explicit examples and provide connections to the recently introduced class of dynamic variational preferences.

Sign in / Sign up

Export Citation Format

Share Document