Logo Logo
Switch Language to German
Lang, Matthias (April 2017): First-Order and Second-Order Ambiguity Aversion. In: Management Science, Vol. 63, No. 4: pp. 1254-1269
Full text not available from 'Open Access LMU'.


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.