Econometrica: Mar, 2001, Volume 69, Issue 2

Subjective Probabilities on Subjectively Unambiguous Events

https://doi.org/10.1111/1468-0262.00193
p. 265-306

Larry G. Epstein, Jiankang Zhang

This paper suggests a behavioral definition of (subjective) ambiguity in an abstract setting where objects of choice are Savage‐style acts. Then axioms are described that deliver probabilistic sophistication of preference on the set of unambiguous acts. In particular, both the domain and the values of the decision‐maker's probability measure are derived from preference. It is argued that the noted result also provides a decision‐theoretic foundation for the Knightian distinction between risk and ambiguity.