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ELLSBERG’S PARADOX AND THE VALUE OF CHANCES

Published online by Cambridge University Press:  01 December 2015

Richard Bradley*
Affiliation:
London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK. Email: r.bradley@lse.ac.uk. URL: http://personal.lse.ac.uk/bradleyr/

Abstract:

What value should we put on our chances of obtaining a good? This paper argues that, contrary to the widely accepted theory of von Neumann and Morgenstern, the value of a chance of some good G may be a non-linear function of the value of G. In particular, chances may have diminishing marginal utility, a property that is termed chance uncertainty aversion. The hypothesis that agents are averse to uncertainy about chances explains a pattern of preferences often observed in the Ellsberg paradox. While these preferences have typically been taken to refute Bayesian decision theory, it is shown that chance risk aversion is perfectly compatible with it.

Type
Symposium on Rational Choice and Philosophy
Copyright
Copyright © Cambridge University Press 2015 

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