Probability, Expected Utility, and the Ellsberg Paradox

The Ellsberg paradox is often cited as evidence for unknowable “ambiguity” versus computable “risk”, and a refutation of expected utility maximization and “subjective” or “belief-type” probabilities. I have concluded the paradox is not convincing. The results can be explained by differences in distributions that show up in repeated “games.” The distributions behind Ellsberg’s thought experiments are different and economic agents should be expected to respond to these differences.

The 16-page paper (.pdf) can be found on SSRN, updated May 2011 or here on the Close Mountain site

About Thomas Coleman

Thomas S. Coleman is Senior Advisor at the Becker Friedman Institute for Research in Economics and Adjunct Professor of Finance at the Booth School of Business at the University of Chicago. Prior to returning to academia, Mr. Coleman worked in the finance industry for more than twenty years with considerable experience in trading, risk management, and quantitative modeling. Mr. Coleman earned a PhD in economics from the University of Chicago and a BA in physics from Harvard College.
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