Absolute and Relative Ambiguity Attitudes

TL;DR

This paper develops a theoretical framework for preferences exhibiting absolute and relative ambiguity attitudes, without assuming convexity, and relates these to experimental findings on ambiguity tolerance.

Contribution

It introduces novel characterizations of ambiguity attitudes that do not rely on convexity, linking them to existing representations and applying them to risk sharing models.

Findings

Characterization of decreasing absolute ambiguity aversion via superadditive certainty equivalents.

Linking decreasing relative ambiguity aversion to positive superhomogeneity.

Application to classic risk sharing results and subjective beliefs.

Abstract

We represent preferences that exhibit absolute or relative attitudes towards ambiguity without assuming convexity of preferences. Our analysis is motivated by the recent experimental evidence by Baillon and Placido (2019) indicating that ambiguity becomes more tolerable as individuals are better off overall. Decreasing absolute ambiguity aversion is characterized by constant superadditive certainty equivalents and admits an act-dependent variational representation (Maccheroni et al., 2006). Decreasing relative ambiguity aversion relates to positive superhomogeneity and admits an act-dependent confidence preference representation (Chateauneuf and Faro, 2009). We apply our characterizations to retrieve a classic risk sharing result on the efficiency of trade and subjective beliefs of the individuals (Rigotti et al., 2008).