Cautious and Globally Ambiguity Averse

Abstract

I study ambiguity attitudes in Uzi Segal's recursive non-expected utility model. I show that according to this model, the negative certainty independence axiom over simple lotteries is equivalent to a robust, or global form of ambiguity aversion that requires ambiguity averse behavior irrespective of the number of states and the decision maker's second-order belief. Thus, the recursive cautious expected utility model is the only subclass of Segal's model that robustly predicts ambiguity aversion. Similarly, the independence axiom over lotteries is equivalent to a robust form of ambiguity neutrality. In fact, any non-expected utility preference over lotteries coupled with a suitable second-order belief over three states produces either the Ellsberg paradox or the opposite mode of behavior. Finally, I propose a definition of a mean-preserving spread for second-order beliefs that is equivalent to increasing ambiguity aversion for every recursive preference that satisfies the negative certainty independence axiom.