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Re-examining the law of iterated expectations for Choquet decision makers

Abstract

Yoo (Economic Letters 37:145–149, 1991) argues that the law of iterated expectations must be violated if the probability measure of a Choquet decision maker is non-additive. In this article, we prove the positive result that the law of iterated expectations is satisfied for Choquet decision makers whenever they update their non-additive beliefs in accordance with the Sarin and Wakker (Journal of Risk and Uncertainty 16:223–250, 1998) update rule. The formal key to this result is the act-dependence of the Sarin–Wakker update rule, which does not hold for the update rules considered by Yoo (1991).

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Correspondence to Alexander Zimper.

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Zimper, A. Re-examining the law of iterated expectations for Choquet decision makers. Theory Decis 71, 669–677 (2011). https://doi.org/10.1007/s11238-010-9221-8

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Keywords

  • Non-additive probability measures
  • Choquet expected utility theory
  • Dynamic decision making
  • Asset pricing

JEL Classification

  • C72
  • D81
  • D90