Theory and Decision

, Volume 58, Issue 1, pp 3–76

The Likelihood Method for Decision under Uncertainty

Article
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Abstract

This paper introduces the likelihood method for decision under uncertainty. The method allows the quantitative determination of subjective beliefs or decision weights without invoking additional separability conditions, and generalizes the Savage–de Finetti betting method. It is applied to a number of popular models for decision under uncertainty. In each case, preference foundations result from the requirement that no inconsistencies are to be revealed by the version of the likelihood method appropriate for the model considered. A unified treatment of subjective decision weights results for most of the decision models popular today. Savage’s derivation of subjective expected utility can now be generalized and simplified. In addition to the intuitive and empirical contributions of the likelihood method, we provide a number of technical contributions: We generalize Savage’s nonatomiticy condition (“P6”) and his assumption of (sigma) algebras of events, while fully maintaining his flexibility regarding the outcome set. Derivations of Choquet expected utility and probabilistic sophistication are generalized and simplified similarly. The likelihood method also reveals a common intuition underlying many other conditions for uncertainty, such as definitions of ambiguity aversion and pessimism.

Keywords

Likelihood method Subjective expected utility Probabilistic sophistication Choquet expected utility Rank dependence Ambiguity Belief measurement 

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Copyright information

© Springer 2005

Authors and Affiliations

  1. 1.GRIDMaison de la Recherche de l’ESTPCachanFrance
  2. 2.CREED, Dept. of EconomicsUniversity of AmsterdamAmsterdamThe Netherlands

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