Recursive non-expected utility: Connecting ambiguity attitudes to risk preferences and the level of ambiguity

Abstract

I study how risk preferences and the level of ambiguity influence ambiguity attitudes in Uzi Segal's recursive second-order non-expected utility model. It is shown that the negative certainty independence axiom for risk preferences is equivalent to a global form of ambiguity aversion that entails ambiguity averse behavior irrespective of the state space and the decision maker's second-order belief. Thus, the second-order version of the cautious expected utility model is the only subclass of Segal's theory that robustly predicts ambiguity aversion. Moreover, a mean-preserving spread operation over second-order beliefs, which corresponds to a particular way of increasing the level of ambiguity, is equivalent to increasing the relative strength of ambiguity aversion for each possible specification of risk preferences within the cautious expected utility model. An application of the latter result establishes a negative relation between participation rates in an asset market and the level of ambiguity concerning the distribution of returns.