Beyond Uncertainty Aversion

Abstract

Although much of the theoretical literature on ambiguity works under the assumption of uncertainty aversion, experimental evidence suggests that it is not a universal behavioral trait. This paper introduces and axiomatises the family of α-UA (for α-Uncertainty Attitude) preferences: a simple extension of the family of uncertainty averse preferences (Cerreia-Vioglio et al., 2011b) with a Hurwicz-style mixing coefficient, so as to admit a richer range of uncertainty attitudes. The parameters of the model are uniquely identified in our characterisation. This provides, in the Hurwicz α-maxmin EU special case, a new resolution of a long-standing identification problem for this model. Moreover, it yields novel models as special cases, including extensions of variational and multiplier preferences (Maccheroni et al., 2006; Hansen and Sargent, 2001) beyond the assumption of uncertainty aversion. Comparative statics support the interpretation of the mixing coefficient as an index of imprecision aversion. In a standard portfolio problem, the model yields the intuitive relationship between imprecision aversion and investment in an uncertain asset: as the former increases, the latter decreases.