Expected Utility with Uncertain Probabilities Theory

Yehuda Izhakian

Abstract

This paper introduces a model of decision making under ambiguity by applying the Bayesian approach to uncertain probabilities . In this model, preferences for ambiguity pertain directly to probabilities such that attitude toward ambiguity is defined as attitude toward mean-preserving spreads in probabilities---analogous to the Rothschild-Stiglitz risk attitude toward mean-preserving spreads in outcomes. The model refines the separations between tastes and beliefs, and between risk and ambiguity. These separations are crucial for the measurement of the degree of ambiguity and for the elicitation and characterization of attitudes toward ambiguity, thereby providing an empirically and experimentally applicable framework.