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Next: Savage/Ellsberg/ Klibanoff et al./Snow

Next: Savage/Ellsberg/ Klibanoff et al./Snow

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  1. Foundations of Statistics Risk, Ambiguity, and the Savage Axioms A Smooth Model of Decision Making under Ambiguity On the possibility of profitable self-selection contracts in competitive insurance markets Next: Savage/Ellsberg/Klibanoff et al./Snow

  2. Ellsberg Definitions

  3. Savage’s P2: sure-thing principle High Ambiguity Urn 1: 100 red and black balls Pure risk Urn 2: 50 red balls and 50 black balls ? ? Which bet do you prefer? a) Draw a ball from Urn 1. Get $100 if is RED; otherwise nothing. b) Draw a ball from Urn 2. Get $100 if is RED; otherwise nothing. Which bet do you prefer? c) Draw a ball from Urn 1. Get $100 if is BLACK; otherwise nothing. d) Draw a ball from Urn 2. Get $100 if is BLACK; otherwise nothing.

  4. Formalization of Ambiguity Aversion and Applications to Contracting Klibanoff, Marinacci, Mukerji (2005) Snow (2010) applies this to insurance contracting. Compensation contracting is a dual problem and seems ripe and open.