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The Ellsberg paradox demonstrates that people’s belief over uncertain events might not be representable by subjective probability. We relate this paradox to other commonly observed anomalies, such as a rejection of the backward induction prediction in the one-shot Ultimatum Game. We argue that the pattern common to these observations is that the behavior is governed by “rational rules”. These rules have evolved and are optimal within the repeated and concurrent environments that people usually encounter. When an individual relies on these rules to analyze one-shot or single circumstances, paradoxes emerge. We show that when a risk averse individual has a Bayesian prior and uses a rule which is optimal for simultaneous and positively corre- lated ambiguous risks to evaluate a single vague circumstance, his behavior will exhibit uncertainty aversion. Thus, the behavior predicted by Ellsberg may be explained within the Bayesian expected utility paradigm. Download Paper
"No Trade" Theorems claim that the mere arrival of new information can not induce trade between rational agents, even in the presence of asymmetric information. We analyze an economy in which the information agents receive is without noise. As long as preferences abide by the Sure Thing Principle, the no-trade result holds. However, under more general preferences, which do not satisfy the Sure Thing Principle, we find that dynamic consistency is a necessary but might not be a sufficient condition for information not to induce trade, even with noiseless information. We provide sufficient conditions for a No-Trade. Theorem and investigate the pattern of trade with and without dynamic consistency of preferences. Download Paper