David Kelsey

• D.Phil
• Professor at University of Nottingham

In this paper we prove some versions of the Arrow Impossibility Theorem, with the collective rationality condition weakened from transitivity to acyclicity, and the Pareto condition replaced by weaker conditions. Thus this result has weaker assumptions than versions of the Arrow Theorem which have previously appeared in the literature. Consequently...

This paper studies asymmetric profitability of the momentum trading strategy. When investors face Knightian uncertainty, they react differently to past winners and losers, which creates asymmetric patterns in price continuations. This asymmetry increases with the level of market and idiosyncratic uncertainty relating to the fundamental value of sto...

We report an experimental test of the influence of ambiguity on behaviour in a coordination game. We study the behaviour of subjects in the presence of ambiguity and attempt to determine whether they prefer to choose an ambiguity safe option. We find that this strategy, which is not played in either Nash equilibrium or iterated dominance equilibriu...

Karni and Vierø (2013) propose a model of belief revision under growing awareness—reverse Bayesianism—which posits that as a person becomes aware of new acts, consequences, or act-consequence links, she revises her beliefs over an expanded state space in a way that preserves the relative likelihoods of events in the original state space. A key feat...

We explore the implications of unawareness for tort law. We study cases where injurers and victims initially are unaware that some acts can yield harmful consequences, or that some acts or harmful consequences are even possible, but later become aware. We model unawareness by Reverse Bayesianism. We compare the two basic liability rules of Anglo‐Am...

Karni and Vierø (2013) propose a model of belief revision under growing awareness-reverse Bayesianism-which posits that as a person becomes aware of new acts, consequences , or act-consequence links, she revises her beliefs over an expanded state space in a way that preserves the relative likelihoods of events in the original state space. A key fea...

Cultural differences can be a source of ambiguity in coordination games. As players are likely to experience more ambiguity when playing a different culture, we expect players to choose safer strategies. We run experiments with a stag hunt and bargaining coordination game. Using a between-subjects design, we vary the identity of the opponent betwee...

Accounting for ambiguity aversion in dynamic decisions generally implies that either dynamic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people’s preferences, we tested them using a variation of Ellsberg’s three-color urn experiment. Subjects were asked to make a choice both befo...

Karni and Vierø (2013) propose a model of belief revision under growing awareness-reverse Bayesianism-which posits that as a person becomes aware of new acts, consequences , or act-consequence links, she revises her beliefs over an expanded state space in a way that preserves the relative likelihoods of events in the original state space. A key lim...

The paper examines contests where players perceive ambiguity about their opponents' strategies and determines how perceptions of ambiguity and attitudes to ambiguity affect equilibrium choice. Behaviour in our contest is affected by pessimistic and optimistic traits. Which of these traits dominates determines the relationship between the equilibriu...

Unawareness is a form of bounded rationality where a person fails to conceive all feasible acts or consequences or to perceive as feasible all conceivable act-consequence links. We study the implications of unawareness for tort law, where relevant examples include the discovery of a new product or technology (new act), of a new disease or injury (n...

We conducted a set of experiments to compare the effect of ambiguity in single-person decisions and games. Our results suggest that ambiguity has a bigger impact in games than in ball and urn problems. We find that ambiguity has the opposite effect in games of strategic substitutes and complements. This confirms a theoretical prediction made by Eic...

We propose a solution concept for a class of extensive form games with ambiguity. SpeciÖcally we consider multi-stage games. Players have CEU preferences. The associated ambiguous beliefs are revised by Generalized Bayesian Updating. We assume individuals take account of possible changes in their preferences by using consistent planning. We show th...

Environmental accidents often involve ambiguous risks, i.e., the relevant probabilities are unknown. This paper studies how liability rules are affected by ambiguity. The injurer and the victim choose a level of care, which is observable, and an unobservable action. Both actions may affect the size and/or likelihood of loss. We analyze the welfare...

This paper studies the impact of ambiguity in the best shot and weakest link models of public good provision. The models are first analysed theoretically. Then we conduct experiments to study how ambiguity affects behaviour in these games. We test whether subjects' perception of ambiguity differs between a local opponent and a foreign one. We find...

We run experiments with a stag hunt and bargaining coordination game. Using a between-subjects design, we vary the identity of the opponent between someone of the same culture or a different culture. The idea is to see whether cultural norms or identity play a part in coordination decisions. We compare the responses of British and Asian students at...

This paper studies the impact of ambiguity in the best shot and weakest link models of public good provision. The models are first analysed theoretically. Then we conduct experiments to study how ambiguity affects behaviour in these games. We test whether subjects' perception of ambiguity differs between a local opponent and a foreign one. We find...

We analyse risk-sharing when individuals perceive ambiguity about future events. The main departure from previous work is that different individuals perceive ambiguity differently. We show that individuals fail to share risks for extreme events. This may provide an explanation why we do not observe individuals buying insurance for certain events li...

We report the results from a set of experiments conducted to test the e¤ect of ambiguity on individual behaviour in games of strategic complements and strategic substitutes. We test whether subjects'perception of ambiguity di¤ers when faced by a local opponent as opposed to a foreign one. Interestingly, though subjects often choose an ambiguity saf...

The paper examines the effect of ambiguity on contests where multiple parties expend resources to win a prize. We develop a model where contenders perceive ambiguity about their opponents' strategies and determine how perceptions of ambiguity and attitudes to ambiguity affect equilibrium choice. The paper also investigates how equilibrium under amb...

Raiffa (1961) has suggested that ambiguity aversion will cause a strict preference for randomization. We show that dynamic consistency implies that individuals will be indi¤erent to ex ante randomizations. On the other hand, it is possible for a dynamically-consistent ambiguity averse preference relation to exhibit a strict preference for some ex p...

We analyze risk sharing when individuals perceive ambiguity about future events. The main departure from previous work is that the individuals perceive ambiguity differently. We show that individuals fail to share risks for extreme events. This may provide an explanation why we do not observe individuals buying insurance for certain events like hur...

This article considers the impact of ambiguity in strategic situations. It extends the existing literature on games with ambiguity-averse players by allowing for optimistic responses to ambiguity. We use the CEU model of ambiguity with a class of capacities introduced by J.-Y. Jaffray and F. Philippe [Math. Oper. Res. 22, No. 1, 165–185 (1997; Zbl...

Raiffa-QJE-1961 has suggested that ambiguity aversion will cause a strict preference for randomization. We show that dynamic consistency implies that individuals will be indifferent to ex ante randomizations. On the other hand, it is possible for a dynamically-consistent ambiguity averse preference relation to exhibit a strict preference for some e...

Goeree & Holt (2001) observe that, for some parameter values, Nash equilibrium provides good predictions for actual behaviour in experiments. For other payoff parameters, however, actual behaviour deviates consistently from that predicted by Nash equilibria. They attribute the robust deviations from Nash equilibrium to actual players’ considering n...

This paper reports experiments conducted to test whether ambiguity affects individual behaviour in games of strategic complements and strategic substitutes. We study subject behaviour in the presence of ambiguity in order to ascertain whether subjects' perception of ambiguity differs between a local opponent and a foreign one. We find that an ambig...

We report some experiments conducted to test whether ambiguity influences behavior in a coordination game. We study the behavior of subjects in the presence of ambiguity and attempt to determine whether they prefer to choose an ambiguity safe option. We find that this strategy, which is not played in either Nash equilibrium or iterated dominance eq...

This paper studies how updating affects ambiguity-attitude. In particular we focus on the generalized Bayesian update of the Jaffray-Phillipe sub-class of Choquet Expected Utility preferences. We find conditions for ambiguity-attitude to be the same before and after updating. A necessary and sufficient condition for ambiguity-attitude to be unchang...

In Ghirardato et al. (2004) [7], Ghirardato, Macheroni and Marinacci propose a method for distinguishing between perceived ambiguity and the decision-makerʼs reaction to it. They study a general class of preferences which they refer to as invariant biseparable. This class includes CEU and MEU. They axiomatize a subclass of α-MEU preferences. If att...

In Ghirardato et al. (2004) [7], Ghirardato, Macheroni and Marinacci propose a method for distinguishing between perceived ambiguity and the decision-maker[modifier letter apostrophe]s reaction to it. They study a general class of preferences which they refer to as invariant biseparable. This class includes CEU and MEU. They axiomatize a subclass o...

We analyze three rules for updating neo-additive capacities. Only for Generalized Bayesian Updating is relative optimism the same for both updated and unconditional capacities. For updates of the other two, either the updated capacity is fully optimistic or fully pessimistic.

Author's draft dated 11 January 2010. Final version published in Journal of economics available online at http://www.springerlink.com/ If consumers wholly or partially control a firm with market power they will charge less than the profit maximizing price. Starting at the usual monopoly price, a small price reduction will have a second order effect...

The paper examines the impacts of ambiguity and ambiguity attitudes in macroeconomic coordination games. By formally modelling ambiguity, opti-

Ambiguity refers to a decision situation under uncertainty when there is incomplete information about the likelihood of events. Different formal models of this notion have been developed with differing implications about the representation of ambiguity and ambiguity aversion.

Ambiguity refers to a decision situation under uncertainty when there is incomplete information about the likelihood of events. Different formal models of this notion have been developed with differing implications about the representation of ambiguity and ambiguity aversion.

A decision-maker is said to have an ambiguous belief if it is not precise enough to be represented by a single probability distribution. The pervasive assumption in game theoretic models in economics is that players' beliefs are unambiguous. This paper argues, drawing on examples from economics and politics, that it may be illuminating, in instance...

This paper studies the objective function of the firm in imperfectly competitive industries. If those involved in decisions are also consumers the usual monopoly distortion is reduced. In oligopolistic industries, this may give the firm a strategic advantage and hence, in the right circumstances, will increase profit. If the firm cannot commit not...

Goeree & Holt (2001) observe that, for some parameter values, Nash equilibrium provides good predictions for actual behaviour in experiments. For other payoff parameters, however, actual behaviour deviates consistently from that predicted by Nash equilibria. They attribute the robust deviations from Nash equilibrium to actual players’ considering n...

We report on an experiment in which subjects choose actions in strategic games with either strategic complements or substitutes against a granny, a game theorist or other subjects. The games are selected in order to test predictions on the comparative statics of equilibrium with respect to changes in strategic ambiguity. We find that subjects face...

Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effect...

Ghirardato et al. J Econ Theory 118:133–173, 2004 propose a method for distinguishing between perceived ambiguity and the decision-maker’s reaction to it. They study a general class of preferences which they refer to as invariant biseparable. This class includes CEU and MEU. This note presents some examples which illustrate their results.

In standard game theory, strategic uncertainty in games is resolved in Nash equilibrium, at least for games with a unique Nash equilibrium. Given a player’s equilibrium conjecture about opponents’ play, she chooses a best response that conforms to the opponents’ equilibrium conjecture about her play. What if players lack confidence in their equilib...

The paper studies the impact of informational ambiguity on behalf of informed traders on history-dependent price behaviour in a model of sequential trading in …nancial markets. Following Chateauneuf, Eichberger and Grant (2006), we use neo-additive capacities to model ambiguity. Such ambiguity and attitudes to it can engender herd and contrarian be...

Ambiguity refers to a decision situation under uncertainty when there is incomplete information about the likelihood of events. Different formal models of this notion have been developed with differing implications about the representation of ambiguity and ambiguity aversion.

This paper proves existence of equilibrium and the arbitrage pricing theorem for an asset exchange economy, where individuals' preferences may be incomplete or intransitive. This extends existing results to more general preferences. We also prove the arbitrage pricing theorem for a theory of choice under uncertainty by Bewley [Bewley, T. F. (2002),...

We apply Pires’s coherence property between unconditional and conditional preferences that admit a CEU representation. In conjunction with consequentialism (only those outcomes on states which are still possible can matter for conditional preference) this implies that the conditional preference may be obtained from the unconditional preference by t...

A decision-maker is said to have an ambiguous belief if it is not precise enough to be represented by a single probability distribution. The pervasive assumption in game theoretic models in economics is that players' beliefs are unambiguous. This paper argues, drawing on examples from economics and politics, that it may be illuminating, in instance...

This paper provides a theory of general equilibrium with externalities and/or monopoly. We assume that the firm’s decisions are based on the preferences of shareholders and/or other stakeholders. Under these assumptions a firm will produce fewer negative externalities than the comparable profit maximising firm. In the absence of externalities, equi...

Given falling birth rates, ageing baby boomers approaching retirement age as well as a pension crisis in most advanced economies, understanding the characteristics of the labour supply function of the elderly have taken on a new significance. Even in developing countries, with labour surplus economies, this is a major issue as these poor countries...

Given falling birth rates, ageing baby boomers approaching retirement age as well as a pension crisis in most advanced economies, understanding the characteristics of the labour supply function of the elderly have taken on a new significance. Even in developing countries, with labour surplus economies, this is a major issue as these poor countries...

In Ghirardato, Macheroni and MArcinaccri (GMM) propose a method for distinguishing between percieved ambiguity and the decision-maker's reaction to it. They study a general class of preferences which includes CEU and a-MEU and axiomatise a subclass of a-MEU preferences. We show that for Hurwicz preferences the proposed measure of ambiguity depends...

The paper studies the impact of ambiguity on history-dependant beahviour in the stan-dard microstructure model of financial markets. We show that differences in ambiguity attitudes between market makers and traders can generate contrarian and herding be-haviour in stock markets where assets are traded sequentially and trading prices are endogenousl...

This paper investigates the dynamic consistency of Choquet Expected Utility (CEU) preferences. A decision-maker is faced with an information structure represented by a fixed filtration. If beliefs are represented by a convex capacity, we show that a necessary and sufficient condition for dynamic consistency is that beliefs be additive over the fina...

In this paper, we consider the effect of ambiguity on the private provision of public goods. Equilibrium is shown to exist and be unique. We examine how provision of the public good changes as the size of the population increases. We show that when there is uncertainty, there may be less free-riding in large societies. Copyright 2005 Blackwell Publ...

This paper studies corporate governance when a firm faces imperfect competition. We derive firms' decisions from utility maximization by individuals. This reduces the usual monopoly distortion. We find that corporate governance can effect the equilibrium in the product (or input) markets. This enables us to endogenize the objective function of the...

This paper studies corporate governance when a firm operates in imperfect markets. We derive firms' decisions from utility maximization by individuals. This reduces the usual monopoly distortion. Corporate governance can effect the equilibrium in the product (or input) markets. This enables us to endogenize the objective function of the firm. If th...

The consequences of ambiguity for partnerships are addressed. Partnerships with symmetric linear production functions are analysed in a Choquet Expected Utility (CEU)-framework. Nash equilibrium in pure strategies is extended to CEU-games. A class of sharing rules are proposed that make constructive use of strategic ambiguity in partnerships. Resul...

If players' beliefs are strictly nonadditive, the Dempster-Shafer updating rule can be used to define beliefs off the equilibrium path. We define an equilibrium concept in sequential two-person games where players update their beliefs with the Dempster-Shafer updating rule. We show that in the limit as uncertainty tends to zero, our equilibrium app...

I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.

Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effect...

This paper provides a theory of a monopolist in general equilibrium. We assume that the firm's decisions are based on the preferences of shareholders and/or other stake-holders. We show that the monopolist will charge less than the profit-maximising price, since shareholders suffer part of the cost of a price rise if they are also consumers. If pri...

This paper studies n-player games where players' beliefs about their opponents' behaviour are modelled as non-additive probabilities. The concept of an “equilibrium under uncertainty” which is introduced in this paper extends the equilibrium notion of Dow and Werlang (1994, J. Econom. Theory64, 305–324) to n-player games in strategic form. Existenc...

Ellsberg''s (1961) famous paradox shows that decision-makers give events with known probabilities a higher weight in their outcome evaluation. In the same article, Ellsberg suggests a preference representation which has intuitive appeal but lacks an axiomatic foundation. Schmeidler (1989) and Gilboa (1987) provide an axiomatisation for expected uti...

We study a decision maker who follows the Savage axioms. We show that if he or she is able to take unobservable actions that influence the probabilities of outcomes, then it can appear to an outsider as if his or her subjective probabilities are nonadditive. Implications for multiperiod decision are explored. We extend the model to include a second...

Applying the new concept of a Dempster-Shafer equilibrium to signalling games, we show that a pooling equilibrium is the unique equilibrium outcome. With strategic uncertainty, signalling productivity by education may no longer be feasible.

We report on a two-stage experiment in which i) we first elicit the social network within a section of undergraduate students and ii) we then measure their altruistic attitudes by means of a standard Dictator game. We observe that more socially integrated subjects are also more altruistic, as betweenness centrality and reciprocal degree are positiv...

The authors assume that a decisionmaker has expected utility preferences over a large space which includes some variables not observable by the theorist. These will induce preferences over observable variables, which typically will not have the expected utility form. This paper focuses on implications for multiperiod decisions. The authors show tha...

In the United States, religious attendance rises sharply with education across individuals, but religious attendance declines sharply with education across denominations. This puzzle is explained if education both increases the returns to social connection and reduces the extent of religious belief, and if beliefs are closely linked to denomination...

This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours an...

This paper proposes a measure of uncertainty-aversion analogous to the Arrow-Pratt Measure of risk aversion. We apply it to multiple priors and non additive probability models of uncertaity. In these models there is non distinction between uncertainty and aversion to it. Hence our theory can olso be interpreted as a measure of uncertainty.

Ellsberg's (1961) famous paradox shows that decision-makers give events with 'known' probabilities a higher weight in their outcome evaluation. In the same article, Ellsberg suggests a preference representation which has intuitive appeal but lacks an axiomatic foundation. Schmeidler (1989) and Gilboa (1987) provide an axiomatisation for expected ut...

We examine the effect of introducing Knightian uncertainty into a simple model of public good provision. We find that uncertainty may reduce the free-rider problem if utility is concave in public goods or there are decreasing returns to scale in the production of public goods. It is possible that free-riding may be less in a large society. We argue...

We study a decision-maker who follows the Savage axioms. We show that if s(he) is able to take unobservable actions which influence the probabilities of outcomes then it can appear to an outsider as if his/her subjective probabilities are non-additive. Implications for multi-period decisions are explored.

In this paper we show that while individuals with non-additive beliefs may display a strict preference for randomisation in an Anscombe–Aumann framework, they will not do so in a Savage-style decision theory. Moreover they will be indifferent to randomisation, unless they have strict preferences between two randomising devices with the same probabi...

This paper applies a proposal of M. Machina (1989) for updating nonexpected utility preferences to D. Schmeidler's (1989) nonadditive probability model. The authors discover that the updated preferences may not themselves satisfy Schmeidler's axioms. Despite this, the updates of uncertainty averse preferences are themselves uncertainty averse. Copy...

If an individual follows maximin expected utility theory, then a smart outsider cannot, in general, make a bet with him/her that is certain to win in a single time period. However, the author shows that, when there are many time periods, this is possible in his model unless the decisionmaker uses strategic behavior. There are some exceptions, in pa...

In this paper we suggest a new interpretation of non-additive probabilities. We study a decision-maker who follows the Savage axioms. We show the if (s)he is able to take unobservable actions which influence the probabilities of outcomes then it can appear to an outsider as if the his/her subjective probabilities are non-additive. We make a related...

In 1989, I. Gilboa and D. Schmeidler proposed an extension of subjective expected utility theory called maxmin expected utility. The author presents a new exposition of this theory and suggests an extension of maxmin expected utility that which does not allow strictly dominated alternatives to be chosen. Maxmin expected utility is related to the ea...

This paper analyzes problems of choice under uncertainty where a decisionmaker does not use subjective probabilities. The decisionmaker has a set of beliefs about which states are more likely than others, but his beliefs cannot be represented as subjective probabilities. Three main kinds of decision rules are possible in this framework. These are m...

This paper analyses risk and risk aversion in the state-dependent utility model, which is useful for modelling health or life insurance purchase. We use Karni's (1983) definition of risk aversion, and extend the class of risks to which it can be applied.