We develop a model of unforeseen contingencies. These are contingencies that are understood by economic agents — their consequences and probabilities are known — but are such that every description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties’ expected utilities. Using a simple co-insurance problem as backdrop, we introduce a model whe...

We define an opportunity act as a mapping from an exogenously given objective state space to a set of lotteries over prizes, and consider preferences over opportunity acts. We allow the preferences to be possibly uncertainty averse. Our main theorem provides an axiomatization of the maxmin expected utility model. In the theorem we construct subjective states to complete the objective state spac...

This note provides a positive answer to the following question. Is it possible to define a set of preference relations, one for each node of a decision tree, such that these preferences satisfy the reduction of compound lotteries axiom and dynamic consistency, and yet do not converge to expected utility? It is argued that updated preferences necessarily have one affine indifference curve but th...

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative ass...

Consumer risk preferences over income are derived from the optimal consumption bundle purchased at each income, via the construction of an indirect uility function. The paper shows that, even though an individual may exhibit risk averse preferences over a wide income range, consumer theory predicts that the opportunity to acquire high-priced luxury goods can induce a convexity in the indirect u...

We argue that “narrow framing,” whereby an agent who is offered a new gamble evaluates that gamble in isolation, may be a more important feature of decisionmaking than previously realized. Our starting point is the evidence that people are often averse to a small, independent gamble, even when the gamble is actuarially favorable. We find that a surprisingly wide range of utility functions, incl...

The goal of this paper is to study irreversible investment under incomplete information. We extend McDonald and Siegel’s (1986) model to the case where the expected rate of return of the project cannot be observed but is known to be either low or high. Waiting and observing the realizations of the value of the project provides information to the investor who can update her beliefs about the tru...

This paper constructs a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth to study how the interaction between two types of uncertainty due to ignorance affects strategic consumption-portfolio rules and precautionary savings. Specifically, after solving the model explicitly, we theoretically and quantitatively explore (i) how th...

This paper makes explicit the links between preferences over lotteries on length of life and intertemporal choice. I show that the approach used by traditional life cycle models to account for uncertain survival corresponds to a strong assumption of risk neutrality with respect to the length of life. Relaxing such an assumption leads us to develop a more general formulation of lifetime utility ...

The idea of representing choice under uncertainty as a trade-off between mean returns and some measure of risk or uncertainty is fundamental to the analysis of investment decisions. In this paper, we show that preferences can be characterized in this way, even in the absence of objective probabilities. We develop a model of uncertainty averse preferences that is based on a mean and a measure of...