Living without state-independence of utilities
- 69 Downloads
This article is concerned with the representation of preferences which do not satisfy the ordinary axioms for state-independent utilities. After suggesting reasons for not being satisfied with solutions involving state-dependent utilities, an alternative representation shall be proposed involving state-independent utilities and a situation-dependent factor. The latter captures the interdependencies between states and consequences. Two sets of axioms are proposed, each permitting the derivation of subjective probabilities, state-independent utilities, and a situation-dependent factor, and each operating in a different framework. The first framework involves the concept of a decision situation—consisting of a set of states, a set of consequences and a preference relation on acts; the probabilities, utilities and situation-dependent factor are elicited by referring to other, appropriate decision situations. The second framework, which is technically related, operates in a fixed decision situation; particular “subsituations” are employed in the derivation of the representation. Possible interpretations of the situation-dependent factor and the notion of situation are discussed.
KeywordsElicitation Subjective probability Subjective expected utility State-dependent utility Small worlds
JEL ClassificationD81 C60
Unable to display preview. Download preview PDF.
- Arrow K.J. (1974) Optimal insurance and generalized deductibles. Scandinavian Actuarial Journal 1: 1–42Google Scholar
- Drèze J.H. (1987) Essays on economic decisions under uncertainty. Cambridge University Press, CambridgeGoogle Scholar
- Drèze, J. H., & Rustichini, A. (2004). State-dependent utility and decision theory. In S. Barberà, P. J. Hammond, & C. Seidl (Eds.), Handbook of utility theory (Vol. 2). Dordrecht: Kluwer.Google Scholar
- Fishburn P.C. (1970) Utility theory for decision making. Wiley, New YorkGoogle Scholar
- Hammond, P. J. (1998). Subjective expected utility. In S. Barberà, P. J. Hammond, & C. Seidl (Eds.), Handbook of utility theory (Vol. 1). Dordrecht: Kluwer.Google Scholar
- Hill, B. (2007). Dynamic awareness. Technical Report 881/2007, GREGHEC.Google Scholar
- Hill B. (2009) Three analyses of sour grapes. In: Grüne-Yanoff T., Hansson S.O. (eds) Preference change: Approaches from philosophy, economics and psychology. Springer, Theory and Decision Library A, BerlinGoogle Scholar
- Karni E. (1985) Decision making under uncertainty. Harvard University Press, CambridgeGoogle Scholar
- Karni, E. (2008). A theory of Bayesian decision making. Working Paper.Google Scholar
- Savage, L. J. (1954). The foundations of statistics (2nd ed., 1971). New York: Dover.Google Scholar