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“Risk, Ambiguity, and Savage Axioms” by Ellsberg Essay


The article under critique is “Risk, Ambiguity, and Savage Axioms” by Daniel Ellsberg. The author begins his article with the skeptical description of Knight’s differentiation between measurable and unmeasurable uncertainties; the issue is that the uncertainties of the latter type were characterized as the ones that cannot be expressed using numerical probabilities (Ellsberg, 1961). However, the individuals had the degrees of belief that drove them to act in certain ways based on their perception of the effect of the unmeasurable uncertainties. Further, the author presents a discussion of the behaviors of choice that are usually based on the individual perceptions of circumstances typical for different decision-makers.

The author is aware that the article covers quite a complex subject of individual choices and experiences and that is why, to support this statements and explanations, Ellsberg (1961) uses examples (such as the one with throwing dice and urns with balls of different colors) – this is definitely one of the article’s strengths because a vague and multifaceted topic is made comprehensible with the help of illustrations that to which everyone could relate.

The argument in the article revolves around Savage’s postulate of the expected utility where each situation is evaluated by an individual as having diverse outcomes each of which has its own degree of utility. Based on this assessment, the decision maker’s final choice follows a formula relying on the person’s subjective belief and perception as well as the utility of each possible outcome (Ellsberg, 1961). The author points out that the willingness or inclination of the individuals to act according to Savage’s postulate is not present in every situation; in that way, the cases where the decision-makers’ situational behaviors do not follow the postulate should be recognized as exceptions.

In particular, the author reviews a variety of scenarios where the decision-maker is indifferent to the odds and outcomes of the bet or decides to go against the commonly preferred odds. The primary weakness of the article is the complexity of the subject under discussion and the challenge of presenting the argument in a clear manner. However, along with the description of the theory that serves as the basis for his argument, Ellsberg (1961) comments on it using basic examples and also provides tables for better visibility.

However, it is possible to notice that the simplicity of the examples employed by the author for the demonstration of his point may be the major reason for the criticism of his position. In other words, the postulates of Savage were developed to be applied in the business-related situations and scenarios where the decision-makers are to take into consideration a variety of factors and impacts and then identify the potential outcomes as well as their utility. In that way, such demonstrations as the teams deciding who is going to bate first or betting on the color of a ball in an urn may be unsuitable to refute the postulates because they cannot be likened to the business scenarios that are usually present when the decision-makers of different organizations choose their future course of actions. Those situations and problems involve many more variables and thus for the decision-making parties it is practically impossible to be ignorant of certain (or all) contributing factors or to be indifferent to the outcomes of the bet.

Reference

Ellsberg, D. (1961). Risk, ambiguity, and Savage axioms. The Quarterly Journal of Economics, 75(4), 643-669.

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IvyPanda. (2020, August 13). "Risk, Ambiguity, and Savage Axioms" by Ellsberg. Retrieved from https://ivypanda.com/essays/risk-ambiguity-and-savage-axioms-by-ellsberg/

Work Cited

""Risk, Ambiguity, and Savage Axioms" by Ellsberg." IvyPanda, 13 Aug. 2020, ivypanda.com/essays/risk-ambiguity-and-savage-axioms-by-ellsberg/.

1. IvyPanda. ""Risk, Ambiguity, and Savage Axioms" by Ellsberg." August 13, 2020. https://ivypanda.com/essays/risk-ambiguity-and-savage-axioms-by-ellsberg/.


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IvyPanda. ""Risk, Ambiguity, and Savage Axioms" by Ellsberg." August 13, 2020. https://ivypanda.com/essays/risk-ambiguity-and-savage-axioms-by-ellsberg/.

References

IvyPanda. 2020. ""Risk, Ambiguity, and Savage Axioms" by Ellsberg." August 13, 2020. https://ivypanda.com/essays/risk-ambiguity-and-savage-axioms-by-ellsberg/.

References

IvyPanda. (2020) '"Risk, Ambiguity, and Savage Axioms" by Ellsberg'. 13 August.

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