NEXT: SAVAGE/ELLSBERG/KLIBANOFF ET AL./SNOW

Foundations of Statistics

Risk, Ambiguity, and the Savage Axioms

A Smooth Model of Decision Making under Ambiguity

On the possibility of profitable self-selection contracts incompetitive insurance markets

Ellsberg Definitions

Uncertainty

Unmeasurable uncertainty:Ambiguity

A lack of confidence in estimates of relative

likelihoods.

Measurable uncertainty:Risk

Probabilities (objective or subjective) can be formed

for events

Savage’s P2: sure-thing principleHigh AmbiguityUrn 1: 100 red and black balls

Pure risk Urn 2: 50 red balls and 50 black balls

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Which bet do you prefer?a) Draw a ball from Urn 1. Get $100 if is RED; otherwise nothing.b) Draw a ball from Urn 2. Get $100 if is RED; otherwise nothing.

Which bet do you prefer?c) Draw a ball from Urn 1. Get $100 if is BLACK; otherwise nothing.d) Draw a ball from Urn 2. Get $100 if is BLACK; otherwise nothing.

Formalization of Ambiguity Aversion and Applications to Contracting

Klibanoff, Marinacci, Mukerji (2005)

Snow (2010) applies this to insurance contracting.Compensation contracting is a dual problem and seems ripe and open.