Econometrica: Nov 2010, Volume 78, Issue 6

A Paradox for the “Smooth Ambiguity” Model of Preference

https://doi.org/10.3982/ECTA8689
p. 2085-2099

Larry G. Epstein

Two Ellsberg‐style thought experiments are described that reflect on the smooth ambiguity decision model developed by Klibanoff, Marinacci, and Mukerji (2005). The first experiment poses difficulties for the model's axiomatic foundations and, as a result, also for its interpretation, particularly for the claim that the model achieves a separation between ambiguity and the attitude toward ambiguity. Given the problematic nature of its foundations, the behavioral content of the model and how it differs from multiple priors, for example, are not clear. The second thought experiment casts some light on these questions.

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