It is well-known that various criteria for comparing aversion to real-outcome risks are equivalent. Some of this theory has been extended to Euclidean-outcome risks. We extend it further by:(a) filling the conceptual gaps, most notably by providing a criterion using our generalized Arrow-Pratt...

Ordering alternatives by their degree of ambiguity is a crucial element in decision-making processes in general and in asset pricing in particular. Thus far the literature has not provided an applicable measure of ambiguity allowing for such ordering. The current paper addresses this need by...

Assuming that probabilities (capacities) of events are random, this paper introduces a novel model of decision making under ambiguity, called Shadow probability theory, a generalization of the Choquet expected utility. In this model, probabilities of observable events in a subordinated...

We investigate what it means for one act to be more ambiguous than another. The question is evidently analogous to asking what makes one prospect riskier than another, but beliefs are neither objective nor representable by a unique probability. Our starting point is an abstract class of...

This paper is about the issue of input parameter uncertainty in portfolio optimization in a discrete setting with finite states (such as the case in a world with different macroeconomic regimes). In such a setting, being unable to assign reliable point estimates to the probabilities (or...

We investigate whether alternative asset classes should be included in optimal portfolios of the most prominent investor personae in the Behavioral Finance literature, namely, the Cumulative Prospect Theory, the Markowitz and the Loss Averse types of investors. We develop a stochastic spanning...

A seminal theorem due to Blackwell (1951) shows that every Bayesian decision-maker prefers an informative signal Y to another signal X if and only if Y is statistically sufficient for X. Sufficiency is an unduly strong requirement in most economic problems because it does not incorporate any...

We can overcome uncertainty with uncertainty. Using randomness in our choices and in what we control, and hence in the decision making process, could potentially offset the uncertainty inherent in the environment and yield better outcomes. The example we develop in greater detail is the...

We can overcome uncertainty with uncertainty. Using randomness in our choices and in what we control and hence in the decision making process, could potentially offset the uncertainty inherent in the environment and yield better outcomes. This methodology is suitable for the social sciences...

This paper analyzes the root cause of Ellsberg-type choices. This class of problems shares the feature that at the time of the decision, t=m, the decision maker (DM) possesses partial information about the events/propositions of interest: DM knows the objective probabilities of some sub-class...