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Journal of Risk and Uncertainty

, Volume 41, Issue 2, pp 81–111 | Cite as

The descriptive and predictive adequacy of theories of decision making under uncertainty/ambiguity

  • John D. Hey
  • Gianna Lotito
  • Anna Maffioletti
Article

Abstract

In this paper we examine the performance of theories of decision making under uncertainty/ambiguity from the perspective of their descriptive and predictive power. To this end, we employ an innovative experimental design which enables us to reproduce ambiguity in the laboratory in a transparent and non-probabilistic way. We find that judging theories on the basis of their theoretical appeal, or on their ability to do well in terms of estimation, is not the same as judging them on the basis of their predictive power. We find that the models that perform better in an aggregate sense are Gilboa and Schmeidler’s MaxMin and MaxMax Expected Utility Models, and Ghiradarto et al.’s Alpha Model, implying that more elegant theoretical models do not perform as well as relatively simple models. This suggests that decision-makers, when confronted with a difficult problem, try to simplify it, rather than apply a sophisticated decision rule.

Keywords

Ambiguity Bingo blower Choquet expected utility Decision field theory Decision making (Subjective) expected utility (Gilboa and Schmeidler) MaxMin EU (Gilboa and Schmeidler) MaxMax EU (Ghirardato) alpha model MaxMin MaxMax Minimum regret Prospect theory Uncertainty 

JEL Classifications

D81 C91 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • John D. Hey
    • 1
    • 2
  • Gianna Lotito
    • 3
  • Anna Maffioletti
    • 4
  1. 1.Department of Economics and Related StudiesUniversity of YorkYorkUK
  2. 2.LUISS, RomeItaly and University of YorkYorkUK
  3. 3.Università del Piemonte OrientaleAlessandriaItaly
  4. 4.Università di TorinoTorinoItaly

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