Abstract
A familiar example devised by Daniel Ellsberg to highlight the effects of event ambiguity on preferences is transformed to separate aleatory uncertainty (chance) from epistemic uncertainty. The transformation leads to a lottery acts model whose states involve epistemic uncertainty; aleatory uncertainty enters into the statedependent lotteries. The model proposes von Neumann-Morgenstern utility for lotteries, additive subjective probability for states, and the use of across-states standard deviation weighted by a coefficient of aversion to variability to account for departures from Anscombe-Aumann subjective expected utility. Properties of the model are investigated and a partial axiomatization is provided.
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Fishburn, P. A variational model of preference under uncertainty. J Risk Uncertainty 8, 127–152 (1994). https://doi.org/10.1007/BF01065369
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DOI: https://doi.org/10.1007/BF01065369