Title

Solutions for Some Dynamic Problems with Uncertainty Aversion

Document Type

Report

Publication Date

11-1999

Abstract

In a discounted expected-utility problem, tomorrow's utilities are aggregated across tomorrow's states by the expectation operator. In our problems, this aggregation is accomplished by a Choquet integral of the form iudPa, where a specifies uncertainty aversion. We solve all finite-state problems by either a closed form or a finite- imensional iteration, and show that uncertainty aversion reduces the perceived return on investment, thereby decreasing the saving rate given elastic preferences and increasing the saving rate given inelastic preferences.