On Machina’s paradoxes and limited attention
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Limited attention and similarity of some of the states of the world together may nudge an agent to perceive the “grand world” as a collection of “small worlds”. We use this idea as an explanation for some of the ambiguity paradoxes posed by Machina (Am Econ Rev 99(1):385–392, 2009; Am Econ Rev 104(12):3814–3840, 2014) as a challenge to the prominent ambiguity theories. In addition, we propose a measure of rationality based on a number of potential violations of preference for the first-order stochastic dominance. We use this measure to explore how departures from perfect attention can be improved through changes to the structure of the “small worlds”.
KeywordsLimited attention Ambiguity paradoxes Uncertainty State aggregation FOSD violations
JEL ClassificationD91 D81 D11
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Conflict of interest
The author declares that she has no conflict of interest.