Conditional expected utility

Conditional expected utility

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Article ID: iaor20173208
Volume: 83
Issue: 2
Start Page Number: 175
End Page Number: 193
Publication Date: Aug 2017
Journal: Theory and Decision
Authors:
Keywords: probability, decision theory
Abstract:

Let E equ1 be a class of events. Conditionally Expected Utility decision makers are decision makers whose conditional preferences E equ2 , E E equ3 , satisfy the axioms of Subjective Expected Utility (SEU) theory. We extend the notion of unconditional preference that is conditionally EU to unconditional preferences that are not necessarily SEU. We study a subclass of these preferences, namely those that satisfy dynamic consistency. We give a representation theorem, and show that these preferences are Invariant Bi‐separable in the sense of Ghirardato et al. (Journal of Economic Theory 118:133–173, 2004). We also show that these preferences have only a trivial overlap with the class of Choquet Expected Utility preferences, but there are plenty of preferences of the α equ4 ‐Maxmin Expected Utility type that satisfy our assumptions. We identify several concrete settings where our results could be applied. Finally, we consider the special case where the unconditional preference is itself SEU, and compare our results with those of Fishburn (Econometrica 41:1–25, 1973).

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