We present a novel characterization of random rank-dependent expected utility for finite datasets and finite prizes. As a byproduct, we obtain a characterization of random expected utility that works for finite datasets. The test lends itself to statistical testing. We apply our test to an...

We consider the problem where a modeller conducts sensitivity analysis of a model consisting of random input factors, a corresponding random output of interest, and a baseline probability measure. The modeller seeks to understand how the model (the distribution of the input factors as well as...

The Allais critique of expected utility theory (EUT) has led to the development of theories of choice under risk that relax the independence axiom, but which adhere to the conventional axioms of ordering and monotonicity. Unlike many existing labora-tory experiments designed to test...

Expected utility theory (EUT) is currently the standard framework which formally defines rational decision-making under risky conditions. EUT uses a theoretical device called von Neumann-Morgenstern utility function, where concepts of function and random variable are employed in their...

We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to the fund has stopped. We adopt the life cycle model and demonstrate that the optimal spending rate from the fund is significantly less than the fund's expected real rate of return. The...

Although the link between risk aversion and diminishing marginal utility of wealth is academically well established, theoretical discussions concerning its empirical validity remain. The presented, review-type paper aims to briefly examine theoretical roots responsible for the different views on...

This article reviews recent developments in revealed preference theory. It discusses the testable implications of theories of choice that are germane to specific economic environments. The focus is on expected utility in risky environments, subjected expected utility and maxmin expected utility...

In experiments of decision-making under risk, structural mixture models allow us to take a menu of theories about decision-making to the data, estimating the fraction of people who behave according to each model. While studies using mixture models typically focus only on how prevalent each of...

We present a novel characterization of random rank-dependent expected utility for finite datasets and finite prizes. As a byproduct, we obtain a characterization of random expected utility that works for finite datasets. The test lends itself to statistical testing. We apply our test to an...

This paper develops an approximate closed-form optimal portfolio allocation formula for a spot asset whose variance follows a GARCH(1,1) process. We consider an investor with constant relative risk aversion (CRRA) utility who wants to maximize the expected utility from terminal wealth under a...

In this exploratory study, we challenge real decision makers to make choices in strategic games involving ambiguity, and to rationalize those choices. Such games are unique because they are not optimizable; however, the challenge such decisions represent-making choices over irreversible resource...

Observed individual behavior in the presence of ambiguity is characterized by insufficient responsiveness to changes in subjective likelihoods. Such likelihood insensitivity under ambiguity is integral to theoretical models and predictive of behavior in many important domains such as financial...

We develop a way of ranking and scoring actively managed funds and investment strategies. Our performance measure accounts for the feature that investors may exhibit caution, via the mechanism of ambiguity aversion, when evaluating investment strategies. Linking developed theory to data, we...

We examine a real option model with governance friction and optimal investment and financing decisions when an entrepreneur facing ambiguity considers investing in an innovation project. The novel features of our model are the introduction of jumps in the returns to innovation and investors’...

In this paper, we provide two novel representation theorems for the expected utility model by suitably adjusting independence and continuity. Our representation results suggest that an analyst can refute choice by expected utility whenever violations of weak forms of independence are observed,...

We examine a problem of demand for insurance indemnification, when the insured is sensitive to ambiguity and behaves according to the Maxmin-Expected Utility model of Gilboa and Schmeidler (1989), whereas the insurer is a (risk-averse or risk-neutral) Expected-Utility maximizer. We characterize...

Necessarily, new technical change is facilitated by the development of new technical proficiencies. Whenever the claim to `new technical change' is robust, the accompanying `new technical proficiencies' facilitate an `outcome', in respect of which `old technical proficiencies' are intractable....

Shackle was one of the representative critics of probability calculus. His alternative decision theory was mathematically reformalized by Katzner till 1990s. Following the Katzner's reformalized framework, this paper presents a new interpretation of Shacklean theory by focusing on the common...

This paper investigates the optimal design of incentives when agents distort probabilities. We show that the type of probability distortion displayed by the agent and its degree determine whether an incentivecompatible contract can be implemented, the strength of the incentives included in the...

We investigate consequences of ambiguity on efficient allocations in an exchange economy. Ambiguity is embodied in the model uncertainty perceived by the consumers: they are unsure what would be the appropriate probability measure to apply to evaluate consumption and keep in consideration a set...

In this paper we extend some of the results in the literature on optimal insurance under heterogeneous beliefs in the presence of the no-sabotage condition, by allowing the likelihood ratio to be non-monotone. Under the assumption of prudence and a mild smoothness condition on the likelihood...

In this study, we present a behavioral definition of betrayal aversion with sources of uncertainty and develop a framework for various trust games, including context dependence, communication, and pressure. In our framework, attitudes toward betrayal aversion depend on the perception of...

The present paper introduces a theoretical framework through which the degree of risk aversion with respect uncertain prices can be measured through the context of the indirect utility function (IUF) using a lab experiment. First, the paper introduces the main elements of the duality theory (DT)...

We study a sequential trading mechanism with ambiguity-averse agents modeled by multiple prior preferences. Informed traders employ mixed trading strategies, and their trading probability decreases with the level of ambiguity. If agents are sufficiently ambiguous, informed traders do not trade,...

For most of the second half of the 20th century, modern neoclassical finance, and more generally much of social science, has been based on the von Neumann and Morgenstern (VM) (1944) game theory expected utility axioms as a prescription for rational decision making under uncertainty. Traditional...