November 28, 2010

Subjective Risk, Confidence, and Ambiguity

by Christian P. Traeger

- The paper extends a dynamic version of the classical von Neumann-Morgenstern setting to incorporate a degree of confidence in or subjectivity of probabilistic beliefs. It provides a simple axiomatic characterization of a new preference representation that addresses ambiguity from a simple perspective, employing only basic tools from risk analysis. Conceptually, the paper renders the concept of smooth ambiguity aversion more precise and extends it to a more general notion of aversion to the subjectivity of belief. The representation maintains the normatively desirable axioms of the standard setting including the von Neumann-Morgenstern axioms and time consistency.

Traeger, C.P. (2010). "Subjective Risk, Confidence, and Ambiguity." Department of Agricultural and Resource Economics, UC Berkeley, CUDARE Working Paper No. 1103, May 2010.