Abstract

The paradigm for modelling decision-making under uncertainty has undoubtedly been the theory of Expected Utility, which was first developed by von Neumann and Morgenstern (1944) and later extended by Savage (1954) to the case of subjective uncertainty. The inadequacy of the theory of Subjective Expected Utility (SEU) as a descriptive theory was soon pointed out in experiments, most famously by Allais (1953) and Ellsberg (1961). The observed departures from SEU noticed by Allais and Ellsberg became known as “paradoxes”. The Ellsberg paradox gave rise, several years later, to a new literature on decision-making under ambiguity. The theoretical side of this literature was pioneered by Schmeidler (1989). This literature views the departures from SEU in situations similar to those discussed by Ellsberg as rational responses to ambiguity. The rationality is “recovered” by relaxing Savage's Sure-Thing principle and adding an ambiguity-aversion postulate. Thus the ambiguity-aversion literature takes a normative point of view and does consider Ellsberg-type choices as behavioural “anomalies”