Precautionary saving and the notion of ambiguity prudence

- I define the notion of ambiguity prudence.
- I give the conditions for ambiguity aversion to induce extra precautionary saving.
- One of the conditions is “decreasing absolute ambiguity aversion” (DAAA).
- DAAA is sometimes sufficient for ambiguity prudence.
- Ambiguity prudence results from a combination of ambiguity attitude and perception.

This letter develops a set of simple conditions under which an individual is willing to save an extra amount of money due to the presence of ambiguity concerning his second period wealth. This extra precautionary saving motive is naturally associated with the notion of ambiguity prudence.