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Decomposing a Utility Function Based on Discrete Distribution Independence

Author

Listed:
  • Ying He

    (Department of Business and Economics, University of Southern Denmark, DK-5230 Odense M, Denmark)

  • James S. Dyer

    (Department of Information, Risk, and Operations Management, McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • John C. Butler

    (Department of Finance, McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

Abstract

For two-attribute decision-making problems, the multilinear utility model cannot be applied when the risk aversion on one attribute depends on the level of the other attribute. We propose a family of general preference conditions called n th-degree discrete distribution independence that can accommodate a variety of dependence relationships between two attributes. The special case of second-degree discrete distribution independence is equivalent to the utility independence condition. We focus on third-degree discrete distribution independence that leads to a decomposition formula that contains many other preference models as special cases.

Suggested Citation

  • Ying He & James S. Dyer & John C. Butler, 2014. "Decomposing a Utility Function Based on Discrete Distribution Independence," Decision Analysis, INFORMS, vol. 11(4), pages 233-249, December.
    • Handle: RePEc:inm:ordeca:v:11:y:2014:i:4:p:233-249
    DOI: 10.1287/deca.2014.0302
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    References listed on IDEAS

    as
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