Uncertainty and compound lotteries: calibration

Yoram Halevy*, Emre Ozdenoren

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This paper introduces a theoretical model of decision making in which preferences are defined on both Savage subjective acts and compound objective lotteries. Preferences are two-stage probabilistically sophisticated when the ranking of acts corresponds to the ranking of the respective compound lotteries induced by the acts through the decision maker’s subjective belief. This family of preferences includes various theoretical models proposed in the literature to accommodate non-neutral attitude towards ambiguity. The principle of calibration relates preferences over acts and compound objective lotteries, and provides a foundation for the tight empirical association between probabilistic sophistication and reduction of compound lotteries for all two-stage probabilistically sophisticated preferences.

Original languageAmerican English
Pages (from-to)373-395
Number of pages23
JournalEconomic Theory
Volume74
Issue number2
DOIs
StatePublished - Sep 2022

Bibliographical note

Publisher Copyright:
© 2022, The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature.

Keywords

  • Ambiguity
  • Ellsberg paradox
  • Knightian uncertainty
  • Non-expected utility
  • Two-stage lotteries

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