Theory and Decision

, Volume 46, Issue 2, pp 107–138 | Cite as

E-Capacities and the Ellsberg Paradox

  • Jürgen Eichberger
  • David Kelsey

Abstract

Ellsberg's (1961) famous paradox shows that decision-makers give events with ‘known’ probabilities a higher weight in their outcome evaluation. In the same article, Ellsberg suggests a preference representation which has intuitive appeal but lacks an axiomatic foundation. Schmeidler (1989) and Gilboa (1987) provide an axiomatisation for expected utility with non-additive probabilities. This paper introduces E-capacities as a representation of beliefs which incorporates objective information about the probability of events. It can be shown that the Choquet integral of an E-capacity is the Ellsberg representation. The paper further explores properties of this representation of beliefs and provides an axiomatisation for them.

Ellsberg paradox Uncertainty aversion Choquet integral Non-additive probabilities 

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Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  • Jürgen Eichberger
    • 1
  • David Kelsey
    • 2
  1. 1.WirtschaftstheorieUniversität des SaarlandesSaarbrückenGermany Phone
  2. 2.Department of EconomicsThe University of BirminghamBirminghamUnited Kingdom

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