HEC Research Papers Series,
HEC Paris

Abstract: This paper proposes a model of the decision-maker’s confidence in his probability judgements, in terms of an implausibility measure – a real-valued function on the set of probability functions. A decision rule is axiomatised according to which the decision-maker evaluates acts using sets of probability functions which vary depending on the agent’s implausibility measure and on what is at stake in the choice of the act. The framework proposed yields a natural notion of comparative aversion to lack of confidence, or ambiguity aversion, and allows the definition of an ambiguity premium. It is shown that these notions are equivalent and can be characterised in terms of the implausibility measure representing the agent’s confidence. A simple portfolio example is presented.

Keywords: Confidence; multiple priors; ambiguity aversion; ambiguity premium; implausibility measure

JEL-codes: C69; D81

25 pages, February 20, 2009

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