Theory and Decision

, Volume 80, Issue 3, pp 389–409 | Cite as

The impact of ambiguity and prudence on prevention decisions

Article

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 

References

  1. Alary, D., Gollier, C., & Treich, N. (2013). The effect of ambiguity aversion on insurance and self-protection. The Economic Journal, 123, 1188–1202.CrossRefGoogle Scholar
  2. Berger, L. (2011). Smooth ambiguity aversion in the small and in the large. Working Papers ECARES 2011-020, ULB—Université libre de Bruxelles.Google Scholar
  3. Berger, L. (2014). Precautionary saving and the notion of ambiguity prudence. Economics Letters, 123(2), 248–251.CrossRefGoogle Scholar
  4. Courbage, C., Rey, B., & Treich, N. (2013). Prevention and precaution. In Handbook of insurance, pp. 185–204. Springer.Google Scholar
  5. Eeckhoudt, L., & Gollier, C. (2005). The impact of prudence on optimal prevention. Economic Theory, 26(4), 989–994.CrossRefGoogle Scholar
  6. Ehrlich, I., & Becker, G. (1972). Market insurance, self-insurance, and self-protection. The Journal of Political Economy, 80(4), 623–648.CrossRefGoogle Scholar
  7. Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. The Quarterly Journal of Economics, 75, 643–669.CrossRefGoogle Scholar
  8. Etner, J., Jeleva, M., & Tallon, J.-M. (2012). Decision theory under ambiguity. Journal of Economic Surveys, 26(2), 234–270.CrossRefGoogle Scholar
  9. Etner, J., & Spaeter, S. (2010). The impact of ambiguity on health prevention and insurance. Working Papers of BETA 2010-08, Bureau d’Economie Théorique et Appliquée, UDS, Strasbourg.Google Scholar
  10. Gierlinger, J. & Gollier, C. (2008). Socially efficient discounting under ambiguity aversion. Working Paper.Google Scholar
  11. Gilboa, I. & Marinacci, M. (2011). Ambiguity and the bayesian paradigm. In Advances in economics and econometrics, tenth world congress, Volume 1.Google Scholar
  12. Gilboa, I., & Schmeidler, D. (1989). Maxmin expected utility with a non-unique prior. Journal of Mathematical Economics, 18(2), 141–154.CrossRefGoogle Scholar
  13. Gollier, C. (2001). The Economics of Risk and Time. The MIT Press, Cambridge.Google Scholar
  14. IPCC (2007). Framing Issues. In Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz, O. R. Davidson, P. R. Bosch, R. Dave, L. A. Meyer (Eds.)] Cambridge University PressCambridge University Press, Cambridge, United Kingdom and New York, NY, USA.Google Scholar
  15. IPCC (2014a). Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. [Field, C. B. and Barros, V. R. and Dokken, D. J. and Mach, K. J. and Mastrandrea, M. D. and Bilir, T. E. and Chatterjee, M., and Ebi, KL and Estrada, YO and Genova, RC and others]. Cambridge, UK/New York, NY: Cambridge University Press.Google Scholar
  16. IPCC (2014b). Climate Change 2014, Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Summary for Policymakers. Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlmer, C. von Stechow, T. Zwickel and J. C. Minx (Eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.Google Scholar
  17. Klibanoff, P., Marinacci, M., & Mukerji, S. (2005). A smooth model of decision making under ambiguity. Econometrica, 73, 1849–1892.CrossRefGoogle Scholar
  18. Klibanoff, P., Marinacci, M., & Mukerji, S. (2009). Recursive smooth ambiguity preferences. Journal of Economic Theory, 144(3), 930–976.CrossRefGoogle Scholar
  19. Kreps, D., & Porteus, E. (1978). Temporal resolution of uncertainty and dynamic choice theory. Econometrica, 46(1), 185–200.CrossRefGoogle Scholar
  20. Maccheroni, F., Marinacci, M., & Ruffino, D. (2013). Alpha as ambiguity: Robust mean-variance portfolio analysis. Econometrica, 81(3), 1075–1113.CrossRefGoogle Scholar
  21. Menegatti, M. (2009). Optimal prevention and prudence in a two-period model. Mathematical Social Sciences, 58(3), 393–397.CrossRefGoogle Scholar
  22. Meyer, D. J., & Meyer, J. (2011). A diamond-stiglitz approach to the demand for self-protection. Journal of Risk and Uncertainty, 42(1), 45–60.CrossRefGoogle Scholar
  23. Savage, L. (1954). The Foundations of Statistics (p. 1972). New York: J. Wiley. second revised edition.Google Scholar
  24. Selden, L. (1978). A new representation of preferences over “certain x uncertain” consumption pairs: The “ordinal certainty equivalent” hypothesis. Econometrica, 46(5), 1045–1060.CrossRefGoogle Scholar
  25. Snow, A. (2011). Ambiguity aversion and the propensities for self-insurance and self-protection. Journal of Risk and Uncertainty, 42, 27–43.CrossRefGoogle Scholar
  26. Trautmann, S., & van de Kuilen, G. (2013). Ambiguity attitudes. Prepared for the Blackwell Handbook of Judgment and Decision Making, edited by Gideon Keren and George Wu, Tilburg University.Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

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

Personalised recommendations