The dual theory of the smooth ambiguity model

This paper studies the “dual” theory of the smooth ambiguity model introduced by Klibanoff et al. (Econometrica 73:1849–1892, <CitationRef CitationID="CR14">2005</CitationRef>). Unlike the original model, we characterize attitudes toward ambiguity captured by second-order probabilities. First, we give a set of axioms to derive a dual representation of the smooth ambiguity model. Second, we present a characterization of ambiguity aversion. Last, as an application of our dual model to a portfolio problem, we conduct comparative static predictions which give sufficient conditions to guarantee that an increase in smooth ambiguity aversion decreases the optimal portfolio. Copyright Springer-Verlag Berlin Heidelberg 2014