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Definitions of ambiguous events and the smooth ambiguity model

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Abstract

We examine a variety of preference-based definitions of ambiguous events in the context of the smooth ambiguity model. We first consider the definition proposed in Klibanoff et al. (Econometrica 73(6):1849–1892, 2005) based on the classic Ellsberg two-urn paradox (Ellsberg Q J Econ 75:643–669, 1961) and show that it satisfies several desirable properties. We then compare this definition with those of Nehring (Math Soc Sci 38(2):197–213, 1999), Epstein and Zhang (Econometrica 69:265–306, 2001), Zhang (Econ Theory 20:159–181, 2002), and Ghirardato and Marinacci (J Econ Theory 102:251–289, 2002). Within the smooth ambiguity model, we show that Ghirardato and Marinacci (J Econ Theory 102:251–289, 2002) would identify the same set of ambiguous and unambiguous events as our definition while Epstein and Zhang (Econometrica 69:265–306, 2001) and Zhang (Econ Theory 20:159–181, 2002) would yield a different classification. Moreover, we discuss and formally identify two key sources of the differences compared to Epstein and Zhang (Econometrica 69:265–306, 2001) and Zhang (Econ Theory 20:159–181, 2002). The more interesting source is that these two definitions can confound non-constant ambiguity attitude and the ambiguity of an event.

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Correspondence to Peter Klibanoff.

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We thank Simone Cerreia-Vioglio, Paolo Ghirardato, Mark Machina and Marciano Siniscalchi for helpful discussions.

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Klibanoff, P., Marinacci, M. & Mukerji, S. Definitions of ambiguous events and the smooth ambiguity model. Econ Theory 48, 399–424 (2011). https://doi.org/10.1007/s00199-011-0641-7

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