Abstract
Subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events. In such an instance, the decision maker's beliefs are better represented by a set of probability functions than by a unique probability function. An ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds. This paper attempts a (selective) survey of some of the achievements of the research program which has analyzed important economic phenomena using a methodology that departs from the standard paradigm by explicitly allowing for ambiguity aversion. We specifically look at applications, and implications, of ambiguity aversion in four areas: design of bilateral economic contracts, the trade in financial contracts and financial markets, strategic decision making and finally, the political economy of voting.
Keywords. ambiguity aversion, uncertainty, Knightian uncertainty, non-additive probabilities, capacities, Choquet expectation, economic contracts, financial markets, voting, auctions, public goods.
The paper is available in the following formats:
Authors addresses:Mukerji, Sujoy
E-mail addresses:
| Sujoy Mukerji | sm5@soton.ac.uk |
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