A VARIATIONAL MODEL OF PREFERENCE UNDER UNCERTAINTY

A familiar example devised by Daniel Ellsberg to highlight the effects of event ambiguity on preferences is transformed to separate aleatory uncertainty (chance) from epistemic uncertainty. The transformation l eads to a lottery acts model whose states involve epistemic uncertaint y; aleatory uncertainty enters into the state-dependent lotteries. The model proposes von Neumann-Morgenstern utility for lotteries, additiv e subjective probability for states, and the use of across-states stan dard deviation weighted by a coefficient of aversion to variability to account for departures from Anscombe-Aumann subjective expected utili ty. Properties of the model are investigated and a partial axiomatizat ion is provided.