First-Order and Second-Order Ambiguity Aversion

Lang, Matthias (April 2017): First-Order and Second-Order Ambiguity Aversion. In: Management Science, Bd. 63, Nr. 4: S. 1254-1269

Abstract

Different models of uncertainty aversion imply strikingly different economic behavior. The key to understanding these differences lies in the dichotomy between first-order and second-order ambiguity aversion, which I define here. My definition and its characterization are independent of specific representations of decisions under uncertainty. I show that with second-order ambiguity aversion, a positive exposure to ambiguity is optimal if and only if there is a subjective belief such that the act’s expected outcome is positive. With first-order ambiguity aversion, zero exposure to ambiguity can be optimal. Examples in finance, insurance, and contracting demonstrate the economic relevance of this dichotomy.

• Dokumententyp: Zeitschriftenartikel
• Fakultät: Volkswirtschaft > Lehrstühle
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: D82, D01, D81, G11
• ISSN: 0025-1909
• Sprache: Englisch