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American Economic Review: Vol. 101 No. 4 (June 2011)

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Ambiguity Models and the Machina Paradoxes

Article Citation

Baillon, Aurélien, Olivier L'Haridon, and Laetitia Placido. 2011. "Ambiguity Models and the Machina Paradoxes." American Economic Review, 101(4): 1547-60.

DOI: 10.1257/aer.101.4.1547

Abstract

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results. (JEL D81)

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Authors

Baillon, Aurélien (Erasmus U Rotterdam)
L'Haridon, Olivier (HEC Paris School of Management and IUFM, U Paris IV, Sorbonne)
Placido, Laetitia (HEC Paris School of Management)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty


American Economic Review


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