Using a simple dynamic consumption-based asset pricing model, this paper explores the implications of a representative investor with smooth ambiguity averse preferences [Klibano¤, Marinacci and Mukerji, Econometrica (2005)] and provides a comparative analysis of risk aversion and ambiguity...

This paper shows how de Finetti's book-making principle, commonly used to justify additive subjective probabilities, can be modi-ed to agree with some nonexpected utility models.More precisely, a new foundation of the rank-dependent models is presented that is based on a comonotonic extension of...

We introduce a simple, easy to implement instrument for jointly eliciting risk and ambiguity attitudes. Using this instrument, we structurally estimate a two-parameter model of preferences. Our findings indicate that ambiguity aversion is significantly overstated when risk neutrality is assumed....

Under the hypothesis that aggregate U.S. consumption is random and, more importantly, viewed as ambiguous by consumers, we examine the implications for asset prices and for how consumption fluctuations influence consumer welfare. We consider a simple, Mehra–Prescott-style endowment economy...

Decisions of investing in sovereign assets involve both risk and ambiguity. Ambiguity arises from unknown elements characterizing the value of a generic sovereign. In presence of ambiguity, ambiguity-averse investors are prone to pay for obtaining summary information such as ratings which...

This letter develops a set of simple conditions under which an individual iswilling to save an extra amount of money due to the presence of ambiguity onits second period wealth. This extra precautionary saving motive is naturallyassociated to the notion of ambiguity prudence.

We axiomatize, in an Anscombe-Aumann framework, the class of preferences that admit a representation of the form V(f) = mu - rho(d), where mu is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and rho(d) is a...

We examine a variety of preference-based definitions of ambiguous events in the context of the smooth ambiguity model.  We first consider the definition proposed in Klibanoff, Marinacci, and Mukerji (2005) based on the classic Ellsberg two-urn paradox (Ellsberg (1961)), and show that it...

Ambiguity aversion in dynamic models is motivated by the presence of unknown time-varying features, which agents do not understand and cannot theorize about. We analyze the consequences of this assumption for economic agents and model builders, who typically need to estimate a model, e.g., to...