José Heleno Faro

Variational Bewley Preferences

This paper characterizes variational Bewley preferences over Anscombe and Aumann acts, a class of binary relations that may fail completeness or transitivity vis a vis independence. The main result gives an axiomatization of preference relations ≿ represented as follows:f≿g⇔∫u(f)dp+η(p)≥∫u(g)dp for all p∈Δ, where u is an affine utility index over a convex set X of consequences, η:Δ→[0,∞] is an ambiguity index, and Δ is the set of priors over the state space S. This representation has a natural interpretation as a weighted unanimity rule, with the function η reflecting the weight given to a prior and higher values of η corresponding to priors given less weight. Bewleys incomplete preferences can be identified precisely with the addition of transitivity or independence, and a prior receives weight either 0 if plausible or ∞ when discarded. Also, by adding only completeness, we recover subjective expected utility, i.e., the lack of transitivity implies incompleteness. Finally, we find a strong connection of our model with the class of variational preferences.

Financial market structures revealed by pricing rules: Efficient complete markets are prevalent

It is well known that when an arbitrage-free financial market is incomplete or has tradable financial assets with frictions there must be multiple risk-neutral probability measures. The main motivation for the present study is to elucidate what type of market structure usually emerges from pricing rules. First, we obtain that finitely generated pricing rules, characterized by polytopes of probabilities, capture the class of all finite arbitrage-free financial markets that are potentially incomplete or subject to frictions affecting tradable assets. Next, we provide a novel characterization of efficient securities and introduce related notions of market completeness that underlies pricing rules. Our main result shows that the class of efficient complete markets with bid-ask spreads is the prevalent case revealed by finitely generated pricing rules.

On the confidence preferences model

In this paper we study the model of decision under uncertainty consistent with confidence preferences. In that model, a decision maker held beliefs represented by a fuzzy set of priors and tastes captured by a standard affine utility index on consequences. First, we find some interesting properties concerning the well-known maxmin expected utility model, taking into account the point of view of the confidence preferences model. Further, we provide new examples of preferences that capture ambiguity-averse attitudes weaker than ambiguity attitudes featured by maxmin expected utility theory. Finally, we discuss the axiomatic foundations for the confidence preferences model with optimistic behavior.