Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: This paper discusses how a decision maker should deal with uncertainty, both in the sense of a well-known probability distribution of different outcomes and as a situation where also the probability distribution is unknown. A simple baseline model is used throughout the paper, where the decision maker can invest in order to decrease the health risk. Since the investment is risky, the question concerns how much to invest. We derive and compare the optimal investment level for a number of different decision rules: a best guess rule, a maximin rule, an expected value rule, an expected utility rule, and three different rules that beyond risk aversion also reflect ambiguity aversion. Finally, these decision rules are evaluated more broadly.

Keywords: Investment under uncertainty; risk aversion; ambiguity aversion

JEL-codes: D81; H51; I18

42 pages, May 4, 2010

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