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Recursive Smooth Ambiguity Preferences
, 2007
"... 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 ..."
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Cited by 39 (4 self)
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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.
Axiomatic foundations of multiplier preferences
, 2007
"... This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory. Some properties of multiplier preferences are generalized to the broade ..."
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Cited by 33 (3 self)
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This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory. Some properties of multiplier preferences are generalized to the broader class of variational preferences, recently introduced by Maccheroni, Marinacci and Rustichini (2006). The paper also establishes a link between the parameters of the multiplier criterion and the observable behavior of the agent. This link enables measurement of the parameters on the basis of observable choice data and provides a useful tool for applications. I am indebted to my advisor Eddie Dekel for his continuous guidance, support, and encouragement. I am grateful to Peter Klibanoff and Marciano Siniscalchi for many discussions which resulted in significant improvements of the paper. I would also like to thank Jeff Ely and Todd Sarver for helpful comments and suggestions. This project started after a very stimulating conversation with Tom Sargent and was further shaped by conversations with Lars Hansen. All errors are my own.
Dynamic Asset Allocation with Ambiguous Return Predictability, working paper
, 2009
"... We study an investor’s optimal consumption and portfolio choice problem when he confronts with two possibly misspecified submodels of stock returns: one with IID returns and the other with predictability. We adopt a generalized recursive ambiguity model to accommodate the investor’s aversion to mode ..."
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Cited by 22 (3 self)
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We study an investor’s optimal consumption and portfolio choice problem when he confronts with two possibly misspecified submodels of stock returns: one with IID returns and the other with predictability. We adopt a generalized recursive ambiguity model to accommodate the investor’s aversion to model uncertainty. The investor deals with specification doubts by slanting his beliefs about submodels of returns pessimistically, causing his investment strategy to be more conservative than the Bayesian strategy. This effect is large for high and low values of the predictive variable. Unlike in the Bayesian framework, the hedging demand against model uncertainty may cause the investor’s stock allocations to first decrease sharply and then increase with his prior probability of the IID model, even when the expected stock return under the IID model is lower than under the predictability model. Adopting suboptimal investment strategies by ignoring model uncertainty can lead to sizable welfare costs.
Intertemporal Substitution and Recursive Smooth Ambiguity Preferences
, 2010
"... In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the secondorder act approach à la Klibanoff, Marinac ..."
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Cited by 14 (3 self)
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In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the secondorder act approach à la Klibanoff, Marinacci, and Mukerji (2005) and the twostage randomization approach à la Seo (2009). We characterize risk attitude and ambiguity attitude within these two approaches. We then discuss our model’s application in asset pricing. Our recursive preference model nests some popular models in the literature as special cases.
A Simpli…ed Axiomatic Approach to Ambiguity Aversion, mimeo
, 2009
"... This paper takes the AnscombeAumann framework with horse and roulette lotteries, and applies the Savage axioms to the horse lotteries and the von NeumannMorgenstern axioms to the roulette lotteries. The resulting representation of preferences yields a subjective probability measure over states an ..."
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Cited by 7 (0 self)
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This paper takes the AnscombeAumann framework with horse and roulette lotteries, and applies the Savage axioms to the horse lotteries and the von NeumannMorgenstern axioms to the roulette lotteries. The resulting representation of preferences yields a subjective probability measure over states and two utility functions, one governing risk attitudes and one governing ambiguity attitudes. The model is able to accommodate the Ellsberg paradox and preferences for reductions in ambiguity.
Inferring Beliefs as Subjectively Uncertain Probabilities,” Theory and Decision
, 2011
"... Abstract. We propose a method for estimating subjective beliefs, viewed as a subjective probability distribution. The key insight is to characterize beliefs as a parameter to be estimated from observed choices in a welldefined experimental task, and to estimate that parameter as a random coefficien ..."
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Cited by 2 (1 self)
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Abstract. We propose a method for estimating subjective beliefs, viewed as a subjective probability distribution. The key insight is to characterize beliefs as a parameter to be estimated from observed choices in a welldefined experimental task, and to estimate that parameter as a random coefficient. The experimental task consists of a series of standard lottery choices in which the subject is assumed to use conventional risk attitudes to select one lottery or the other, and then a series of betting choices in which the subject is presented with a range of bookies offering odds on the outcome of some event that the subject has a belief over. Knowledge of the risk attitudes of subjects conditions the inferences about subjective beliefs. Maximum simulated likelihood methods are used to estimate a structural model in which subjects employ subjective beliefs to make bets. We present evidence that some subjective probabilities are indeed best characterized as probability distributions with nonzero variance.
Recursive Smooth Ambiguity Preferences1
"... are those of the authors and not those of the Collegio Carlo Alberto. This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in Klibano¤, Marinacci, and Mukerji (2005). A key feature of the model is that it achieves a separation between ambiguity, identi
ed ..."
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are those of the authors and not those of the Collegio Carlo Alberto. This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in Klibano¤, Marinacci, and Mukerji (2005). A key feature of the model is that it achieves a separation between ambiguity, identi
ed as a characteristic of the decision makers subjective beliefs, and ambiguity attitude, a characteristic of the decision makers tastes. In applications one may thus specify/vary these two characteristics independent of each other, thereby facilitating richer comparative statics and modeling exibility 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. JEL Classi
cation Numbers: D800, D810.
UNCERTAINTY, IDENTIFICATION, AND PRIVACY: EXPERIMENTS IN INDIVIDUAL DECISIONMAKING
, 2009
"... ii The alleged privacy paradox states that individuals report high values for personal privacy, while at the same time report behavior that contradicts a high privacy value. This is a misconception. Reported privacy behaviors can be explained by asymmetric subjective beliefs. Beliefs may or may not ..."
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ii The alleged privacy paradox states that individuals report high values for personal privacy, while at the same time report behavior that contradicts a high privacy value. This is a misconception. Reported privacy behaviors can be explained by asymmetric subjective beliefs. Beliefs may or may not be uncertain, and nonneutral attitudes towards uncertainty are not necessary to explain behavior. The major objective of the research proposed here is to identify attitudes towards uncertainty and replicate reported privacy behaviors in a controlled laboratory environment. This research would be conducted in three related parts. Part One proposes two experiments in individual decision making. The first seeks to identify attitudes towards uncertainty using an experimental replication of Ellsberg’s canonical 2color choice problem. The second proposes to test Smith’s conjecture that Ellsberg’s hypothesized preferences are observable when an ambiguous lottery is replaced by a compound objective lottery. The literature has presented evidence that
Uncertainty
"... This article deals with individual decision making under uncertainty (unknown probabilities). Risk (known probabilities) is not treated as a separate case, but as a subcase of uncertainty. Many results from risk naturally extend to uncertainty. The Allais paradox, commonly applied to risk, also rev ..."
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This article deals with individual decision making under uncertainty (unknown probabilities). Risk (known probabilities) is not treated as a separate case, but as a subcase of uncertainty. Many results from risk naturally extend to uncertainty. The Allais paradox, commonly applied to risk, also reveals empirical deficiencies of expected utility for uncertainty. The Ellsberg paradox reveals deviations from expected utility in a relative, rather than in an absolute, sense, giving withinperson comparisons: for some events (ambiguous or otherwise) subjects deviate more from expected utility than for other events. Besides aversion, many other attitudes towards ambiguity are empirically relevant. In most economic decisions where agents face uncertainties, no probabilities are available. This point was first emphasized by Keynes (1921) and Knight (1921). It was recently reiterated by Greenspan (2004, p. 38): y how y the economy might respond to a monetary policy initiative may need to be drawn from evidence about past behavior during a