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12
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.
Event exchangeability: Probabilistic sophistication without continuity or monotonicity
 Econometrica
, 2006
"... Building on the Ramsey–de Finetti idea of event exchangeability, we derive a characterization of probabilistic sophistication without requiring any of the various versions of monotonicity, continuity, or comparative likelihood assumptions imposed by Savage (1954), Machina and Schmeidler (1992), and ..."
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Cited by 18 (3 self)
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Building on the Ramsey–de Finetti idea of event exchangeability, we derive a characterization of probabilistic sophistication without requiring any of the various versions of monotonicity, continuity, or comparative likelihood assumptions imposed by Savage (1954), Machina and Schmeidler (1992), and Grant (1995). Our characterization identifies a unique and finitelyadditive subjective probability measure over an algebra of events.
JEL classification: D81
, 2010
"... In previous models of (cumulative) prospect theory referencedependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where referencedependence is derived from preference conditions and a u ..."
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In previous models of (cumulative) prospect theory referencedependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where referencedependence is derived from preference conditions and a unique reference point arises endogenously.
Allais, Ellsberg, and Preferences for Hedging
, 2012
"... We study the relation between ambiguity aversion and the Allais paradox. To this end, we introduce a novel definition of hedging which applies to objective lotteries as well as to uncertain acts, and we use it to define a novel axiom that captures a preference for hedging which generalizes the one o ..."
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We study the relation between ambiguity aversion and the Allais paradox. To this end, we introduce a novel definition of hedging which applies to objective lotteries as well as to uncertain acts, and we use it to define a novel axiom that captures a preference for hedging which generalizes the one of Schmeidler (1989). We argue how this generalized axiom captures both aversion to ambiguity, and attraction towards certainty for objective lotteries. We show that this axiom, together with other standard ones, is equivalent to two representations both of which generalize the MaxMin Expected Utility model of Gilboa and Schmeidler (1989). In both, the agent reacts to ambiguity using multiple priors, but does not use expected utility to evaluate objective lotteries. In our first representation, the agent treats objective lotteries as âambiguous objects,â and use a set of priors to evaluate them. In the second, equivalent representation, lotteries are evaluated by distorting probabilities as in the Rank Dependent Utility model, but using the worst from a set of such distortions. Finally, we show how a preference for hedging is not sufficient to guarantee an Ellsberglike behavior if the
Additive Utility in Prospect Theory∗
, 2008
"... Abstract. Prospect theory is currently the main descriptive theory of decision under uncertainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribut ..."
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Abstract. Prospect theory is currently the main descriptive theory of decision under uncertainty. It generalizes expected utility by introducing nonlinear decision weighting and loss aversion. A difficulty in the study of multiattribute utility under prospect theory is to determine when an attribute yields a gain or a loss. One possibility, adopted in the theoretical literature on multiattribute utility under prospect theory, is to assume that a decision maker determines whether the complete outcome is a gain or a loss. In this holistic evaluation, decision weighting and loss aversion are general and attributeindependent. Another possibility, more common in the empirical literature, is to assume that a decision maker has a reference point for each attribute. We give preference foundations for this attributespecific evaluation in which decision weighting and loss aversion are depending on the attributes. ∗Acknowledgements: Tony Marley, Peter P. Wakker, and two anonymous reviewers gave helpful comments. Han Bleichrodt’s research was made possible by a grant from the Netherlands Organization for
Northwestern University
, 2005
"... We find a necessary and sufficient condition for exante trade when agents are nonexpected utility maximizers. The condition is that they share subjective beliefs. Our result holds for a class of convex preferences that contains many functional forms used in applications. In a special case of expec ..."
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We find a necessary and sufficient condition for exante trade when agents are nonexpected utility maximizers. The condition is that they share subjective beliefs. Our result holds for a class of convex preferences that contains many functional forms used in applications. In a special case of expected utility, the condition becomes exactly the common prior assumption. It can also be articulated in the language of other functional forms, confirming results existing in the literature, generating new results, and providing a useful tool for applications. Another contribution of this paper is a characterization of a general definition of beliefs for convex preferences. We show that this definition can be characterized in terms of market behavior. Moreover, it coincides with the usual one for an important class of convex invariant biseparable preferences. 1
Economics
, 2007
"... Abstract: This paper discusses the various approaches that have been adopted to analyze loss aversion under prospect theory. Subsequently, the view is promoted that loss aversion is a property of observable choice behavior. Under prospect theory loss averse behavior is predicted if an utility based ..."
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Abstract: This paper discusses the various approaches that have been adopted to analyze loss aversion under prospect theory. Subsequently, the view is promoted that loss aversion is a property of observable choice behavior. Under prospect theory loss averse behavior is predicted if an utility based measure of loss aversion, corrected by a probability based measure of loss aversion, exceeds 1. It is shown that prominent parametric families of weighting functions, while successful in accommodating empirical findings on probabilistic risk attitudes, may not be suitable for the analysis of loss averse behavior.
Objective Lotteries as . . .
, 2011
"... We derive axiomatically a model in which the Decision Maker can exhibit simultaneously both the Allais and the Ellsberg paradoxes in the standard setup of Anscombe and Aumann (1963). Using the notion of ‘subjective’, or ‘outcome ’ mixture of Ghirardato et al. (2003), we define a novel form of hedg ..."
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We derive axiomatically a model in which the Decision Maker can exhibit simultaneously both the Allais and the Ellsberg paradoxes in the standard setup of Anscombe and Aumann (1963). Using the notion of ‘subjective’, or ‘outcome ’ mixture of Ghirardato et al. (2003), we define a novel form of hedging for objective lotteries, and introduce a novel axiom which is a generalized form of preferences for hedging. We show that this axiom, together with other standard ones, is equivalent to a representation in which the agent reacts to ambiguity using multiple priors like the MaxMin Expected Utility model of Gilboa and Schmeidler (1989), generating an Ellsberglike behavior, while at the same time, she treats also objective lotteries as ‘ambiguous objects,’ and use a fixed (and unique) set of priors to evaluate them – generating an Allaislike behavior. We show that this representation is equivalent to one in which the agent evaluates lotteries using a set of concave rankdependent utility functionals. A comparative notion of preference for hedging is also introduced.
Endogenizing Prospect . . .
, 2010
"... In previous models of (cumulative) prospect theory referencedependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where referencedependence is derived from preference conditions and a u ..."
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In previous models of (cumulative) prospect theory referencedependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where referencedependence is derived from preference conditions and a unique reference point arises endogenously.