Probability, Expected Utility, and the Ellsberg Paradox

Abstract

The Ellsberg paradox is often cited as evidence for unknowable ambiguity versus computable risk, and a refutation of the Savage axioms regarding expected utility maximization and the program for revealing subjective or belief-type probabilities. This note argues that researchers have been too quick to embrace the Ellsberg critique as a refutation of standard expected utility theory. First, Ellsberg performed no actual experiments, and in fact recent empirical evidence on the Ellsberg paradox argues against Second, simple explanations for the paradox deserve as much attention as theories that introduce a new concept such as ambiguity. One such simple explanation is to consider the Ellsberg thought experiment as part of a meta-experiment that includes repeated draws, in which case the choices described by Ellsberg are consistent with expected utility theory.