Theory and Decision

, Volume 80, Issue 3, pp 389–409

The impact of ambiguity and prudence on prevention decisions

Article

DOI: 10.1007/s11238-015-9512-1

Cite this article as:
Berger, L. Theory Decis (2016) 80: 389. doi:10.1007/s11238-015-9512-1

Abstract

Most decisions concerning (self-)insurance and self-protection have to be taken in situations in which (a) the effort exerted precedes the moment uncertainty realizes, and (b) the probabilities of future states of the world are not perfectly known. By integrating these two characteristics in a simple theoretical framework, this paper derives plausible conditions under which ambiguity aversion raises the demand for (self-)insurance and self-protection. In particular, it is shown that in most usual situations where the level of ambiguity does not increase with the level of effort, a simple condition of ambiguity prudence known as decreasing absolute ambiguity aversion (DAAA) is sufficient to give a clear and positive answer to the question: Does ambiguity aversion raise the optimal level of effort?

Keywords

Non-expected utility Self-protection Self-insurance Ambiguity Prudence 

JEL Classification

D61 D81 D91 G11 

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Fondazione Eni Enrico Mattei (FEEM)MilanItaly

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