COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1805 Mean-Dispersion Preferences and Constant Absolute Uncertainty Aversion Simon Grant and Ben Polak June 2011 We axiomatize, in an Anscombe-Aumann framework, the class of
preferences that admit a representation of the form V(f) = mu – rho(d), where mu is
the mean utility of the act f with respect to a given probability, d is the vector of
state-by-state utility deviations from the mean, and rho(d) is a measure of (aversion to)
dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion
preferences is that they exhibit constant absolute uncertainty aversion. This class
includes many well-known models of preferences from the literature on ambiguity. We show
what properties of the dispersion function rho(dot) correspond to known models, to
probabilistic sophistication, and to some new notions of uncertainty aversion. |
