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A Genuine Rank-Dependent Generalization of the Von Neumann-Morgenstern Expected Utility Theorem

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  • Mohammed Abdellaoui

    () (Department of Economics, CNRS, GRID, Ecole Normale Superieure de Cachan, 61 avenue du President Wilson, 94235 Cachan Cedex, France)

Abstract

This paper uses "revealed probability trade-offs" to provide a natural foundation for probability weighting in the famous von Neumann and Morgenstern axiomatic set-up for expected utility. In particular, it shows that a rank-dependent preference functional is obtained in this set-up when the independence axiom is weakened to stochastic dominance and a probability trade-off consistency condition. In contrast with the existing axiomatizations of rank-dependent utility, the resulting axioms allow for complete flexibility regarding the outcome space. Consequently, a parameter-free test/elicitation of rank-dependent utility becomes possible. The probability-oriented approach of this paper also provides theoretical foundations for probabilistic attitudes towards risk. It is shown that the preference conditions that characterize the shape of the probability weighting function can be derived from simple probability trade-off conditions. Copyright The Econometric Society 2002.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 70 (2002)
Issue (Month): 2 (March)
Pages: 717-736

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Handle: RePEc:ecm:emetrp:v:70:y:2002:i:2:p:717-736

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Cited by:
  1. Mikhail Sokolov, 2011. "Interval scalability of rank-dependent utility," Theory and Decision, Springer, vol. 70(3), pages 255-282, March.
  2. Nicolas Drouhin, 2001. "Lifetime Uncertainty and Time Preference," Theory and Decision, Springer, vol. 51(2), pages 145-172, December.
  3. Kfir Eliaz & Debraj Ray & Ronny Razin, 2006. "Choice Shifts in Groups: A Decision-Theoretic Basis," American Economic Review, American Economic Association, vol. 96(4), pages 1321-1332, September.
  4. Denuit, M & Dhaene, Jan & Goovaerts, Marc & Kaas, R & Laeven, R, 2005. "Risk measurement with the equivalent utility principles," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/122216, Katholieke Universiteit Leuven.
  5. George Wu & Jiao Zhang & Mohammed Abdellaoui, 2005. "Testing Prospect Theories Using Probability Tradeoff Consistency," Journal of Risk and Uncertainty, Springer, vol. 30(2), pages 107-131, January.
  6. Liang Zou, 2006. "An Alternative to Prospect Theory," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 1-28, May.

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