When uncertainty is irrelevant to expected utility decision making

Abstract

The author discusses the expected value of including uncertainty in decision making, and also normative bases of ambiguity aversion. It is shown that there are broad classes of utility functions for which uncertainty is irrelevant under expected utility theory, and only mean values are significant. Conversely, there are broad classes of utility functions for which preferences over ambiguity are normatively valid. Finally, preferences over ambiguity, even if valid, are not always relevant to decision making; decision makers may have lower expected utility when a probability is ambiguous than when it is certain, but have the same set of optimal decisions in either case.>

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