A Solution to Ellsberg's Paradox

Abstract

Ellsberg's famous thought experiments demonstrate that most people prefer less ambiguous alternatives to more ambiguous ones. This apparently violates Savage's Sure-thing Principle. I provide a solution to Ellsberg's paradox. More precisely, I demonstrate that ambiguity aversion can be readily explained by subjectivistic decision theory. The given solution is simple and fits perfectly into Savage's subjectivistic framework. Since ambiguity aversion translates into the subjective probabilities of the decision-maker, they could even be used in order to quantify his ambiguity aversion.