Ambiguity without a State Space JOB MARKET PAPER

Many decisions involve both imprecise probabilities and intractable states of the world. Objective expected utility assumes unambiguous probabilities; subjective expected utility assumes a completely specified state space. This paper analyzes a third domain of preference: sets of consequential lotteries. Using this domain, we develop a theory of Knightian ambiguity without explicitly invoking any state space. We characterize a representation that integrates a monotone transformation of first order expected utility with respect to a second order measure. The concavity of the transformation and the weighting of the measure capture ambiguity aversion. We propose a definition for comparative ambiguity aversion and uniquely characterize absolute ambiguity neutrality. Finally, we discuss applications of the theory: reinsurance, games, and a mean–variance–ambiguity portfolio frontier.