Randomization and ambiguity perception

Abstract

Ambiguity-averse decision makers typically dislike not only the presence of ambiguous events but also their increase, contrary to what standard ambiguity models predict. We axiomatically study such a decision maker. She avoids ex ante randomization over prospects since it only increases the number of relevant ambiguous events without providing a hedge against uncertainty. Our axioms lead to a representation in which the decision maker behaves as if optimizing her ambiguity perception at a cost. We show the uniqueness of the representation, and conduct comparatives of attitudes toward ambiguity and its increase. This identification is not achieved without considering ex ante randomization.