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Coherent Decision Analysis with Inseparable Probabilities and Utilities

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  • Nau, Robert F
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    Abstract

    This article explores the extent to which a decisionmaker's probabilities can be measured separately from his/her utilities by observing his/her acceptance of small monetary gambles. Only a partial separation is achieved: the acceptable gambles are partitioned into a set of "belief gambles," which reveals probabilities distorted by marginal utilities for money, and a set of "preference gambles," which reveals utilities reciprocally distorted by marginal utilities for money. However, the information in these gambles still enables us to solve the decisionmaker's problem: his/her utility-maximizing decision is the one that avoids arbitrage (i.e., incoherence or Dutch books). Copyright 1995 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Risk and Uncertainty.

    Volume (Year): 10 (1995)
    Issue (Month): 1 (January)
    Pages: 71-91

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    Handle: RePEc:kap:jrisku:v:10:y:1995:i:1:p:71-91

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    Web page: http://www.springerlink.com/link.asp?id=100299

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    Cited by:
    1. Edi Karni, 2013. "Bayesian decision theory with action-dependent probabilities and risk attitudes," Economic Theory, Springer, vol. 53(2), pages 335-356, June.
    2. Diecidue, E. & Wakker, P.P. & Zeelenberg, M., 2007. "Eliciting decision weights by adapting de Finetti's betting-odds method to prospect theory," Open Access publications from Tilburg University urn:nbn:nl:ui:12-225938, Tilburg University.
    3. Robert Nau, 2001. "De Finetti was Right: Probability Does Not Exist," Theory and Decision, Springer, vol. 51(2), pages 89-124, December.
    4. David M. Pennock & Michael P. Wellman, 2013. "Compact Securities Markets for Pareto Optimal Reallocation of Risk," Papers 1301.3886, arXiv.org.
    5. Edi Karni, 2007. "Bayesian Decision Theory and the Representation of Beliefs," Discussion Paper Series dp444, The Center for the Study of Rationality, Hebrew University, Jerusalem.
    6. Enrico Diecidue & Dolchai La-ornual, 2009. "Reconciling support theory and the book-making principle," Journal of Risk and Uncertainty, Springer, vol. 38(3), pages 173-190, June.
    7. MacLaren, D., 1995. "Uncertainty AVersion and Technical Barriers to Trade: An Australian Example," Department of Economics - Working Papers Series 498, The University of Melbourne.
    8. Edi Karni, 2009. "A Theory of Bayesian Decision Making," Economics Working Paper Archive 550, The Johns Hopkins University,Department of Economics.
    9. Edi Karni, 2009. "A Theory of Bayesian Decision Making," EIEF Working Papers Series 0904, Einaudi Institute for Economics and Finance (EIEF), revised May 2009.
    10. Christian Gollier, 2007. "Whom should we believe? Aggregation of heterogeneous beliefs," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 107-127, October.
    11. Crocker, Thomas D. & Shogren, Jason F. & Turner, Paul R., 1998. "Incomplete beliefs and nonmarket valuation," Resource and Energy Economics, Elsevier, vol. 20(2), pages 139-162, June.
    12. Edi Karni, 2011. "Subjective Probabilities on a State Space," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 172-85, November.

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