The primary objective of this paper is to develop a framework in which a decisionmaker may have subjective beliefs about the “riskiness” of prospects, even though the risk structure of these prospects is objectively specified. Put differently, we investigate preferences over risky alternatives by postulating that such preferences arise from more basic preferences that act on the subjective tran...

This paper analyzes the problem faced by a risk-averse firm considering how much to invest in a risky project. The firm receives a signal about the value of the project. We derive necessary and sufficient conditions on the signal distribution such that (i) the agent's investment is nondecreasing in the realization of the signal, and (ii) different signals can be ranked according to their ex ant...

The Ellsberg paradox demonstrates that people’s belief over uncertain events might not be representable by subjective probability. We argue that Uncertainty Aversion may be viewed as a case of “Rule Rationality”. This paradigm claims that people’s decision making has evolved to simple rules that perform well in most regular environments. Such an environment consists of replicas of some basic si...

The endowment effect has been widely documented. Recent models of reference-dependent preferences indicate that expectations play a prominent role in the presence of the phenomenon. A subset of such expectations-based models predicts an endowment effect for risk when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-dis...

Newcomb's problem is viewed as a dynamic game with an agent and a superior being as players. Depending on whether or not a risk-neutral agent's confidence in the superior being, as measured by a subjective probability assigned to the move order, exceeds a threshold or not, one obtains the one-box outcome or the two-box outcome, respectively. The findings are extended to an agent with arbitrary ...

The concept of qualitative di¤erences in information, i.e. the distinction between risk and ambiguity, builds the framework of a growing strand of economic research. For non additive set functions as used in the Choquet Expected Utility framework, the independent product in general is not unique and the Fubini theorem is restricted to slice-comonotonic functions. In this paper, we use the repre...

The Ellsberg paradox demonstrates that people’s belief over uncertain events might not be representable by subjective probability. We relate this paradox to other commonly observed anomalies, such as a rejection of the backward induction prediction in the one-shot Ultimatum Game. We argue that the pattern common to these observations is that the behavior is governed by “rational rules”. These r...

Should Old-Age Benefits Be Earnings-Tested? We study the welfare effects of earnings testing flat-rate old-age benefits in a quantitative overlapping generations model with idiosyncratic labor income risk. In our model economy, even a moderate earnings testing reduces individuals’ expected lifetime utility, whenever other taxes are taken into account. Moreover, it also lowers the realized lifet...

This paper provides an axiomatic foundation for a maxmin expected utility over a set of priors (MMEU) decision rule in an environment where the elements of choice are Savage acts. This characterization complements the original axiomatization of MMEU developed in a lottery-acts (or Anscombe Aumann) framework by I. Gilboa and D. Schmeidler (1989, J. Math. Econ. 18, 141 153). MMEU preferences are ...

An axiomatic characterization of recursive utility with source-dependent constant relative risk aversion (CRRA), constant elasticity of intertemporal substitution, constant rate of impatience and subjective beliefs is established. The utility form is a minimal extension of Epstein-Zin-Weil utility that allows the CRRA to depend on the source of risk, a dependence that admits an ambiguity aversi...