fool comments on The Ellsberg paradox and money pumps - Less Wrong
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Comments (72)
No, (un)fortunately it is not so.
I say this has nothing to do with ambiguity aversion, because we can replace (1/2, 1/2+-1/4, 1/10) with all sorts of things which don't involve uncertainty. We can make anyone "leave money on the table". In my previous message, using ($100, a rock, $10), I "proved" that a rock ought to be worth at least $90.
If this is still unclear, then I offer your example back to you with one minor change: the trading incentive is still 1/10, and one agent still has 1/2+-1/4, but instead the other agent has 1/4. The Bayesian agent holding 1/2+-1/4 thinks it's worth more than 1/4 plus 1/10, so it refuses to trade. Whereas the ambiguity averse agents are under no such illustion.
So, the boot's on the other foot: we trade, and you don't. If your example was correct, then mine would be too. But presumably you don't agree that you are "leaving money on the table".