Revealed Likelihood and Knightian Uncertainty |
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Authors: | SARIN RAKESH WAKKER PETER |
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Affiliation: | (1) The Anderson Graduate School of Management, UCLA, Los Angeles, CA;(2) Medical Decision Making Unit, Leiden University Medical Center, Leiden, The Netherlands |
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Abstract: | Nonadditive expected utility models were developed for explaining preferences in settings where probabilities cannot be assigned to events. In the absence of probabilities, difficulties arise in the interpretation of likelihoods of events. In this paper we introduce a notion of revealed likelihood that is defined entirely in terms of preferences and that does not require the existence of (subjective) probabilities. Our proposal is that decision weights rather than capacities are more suitable measures of revealed likelihood in rank-dependent expected utility models and prospect theory. Applications of our proposal to the updating of beliefs and to the description of attitudes towards ambiguity are presented. |
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Keywords: | Ellsberg paradox nonadditive probability Choquet-expected rank-dependent utility prospect theory updating of beliefs |
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