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‘Expected utility / subjective probability’ analysis without the sure-thing principle or probabilistic sophistication

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  • Mark Machina

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Abstract

The basic analytical concepts, tools and results of the classical expected utility/subjective probability model of risk preferences and beliefs under subjective uncertainty can be extended to general “event-smooth” preferences over subjective acts that do not necessarily satisfy either of the key behavioral assumptions of the classical model, namely the Sure-Thing Principle or the Hypothesis of Probabilistic Sophistication. This is accomplished by a technique analogous to that used by Machina (1982) and others to generalize expected utility analysis under objective uncertainty, combined with an event-theoretic approach to the classical model and the use of a special class of subjective events, acts and mixtures that exhibit “almost-objective” like properties. The classical expected utility/subjective probability characterizations of outcome monotonicity, outcome derivatives, probabilistic sophistication, comparative and relative subjective likelihood, and comparative risk aversion are all globally “robustified” to general event-smooth preferences over subjective acts. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-004-0573-6
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 26 (2005)
Issue (Month): 1 (07)
Pages: 1-62

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Handle: RePEc:spr:joecth:v:26:y:2005:i:1:p:1-62

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Subjective uncertainty; Almost-objective uncertainty; Robustness.;

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Cited by:
  1. Tomoki Fujii, 2012. "Dynamic Poverty Decomposition Analysis: An Application to the Philippines," Working Papers 34-2012, Singapore Management University, School of Economics.
  2. Wing-Keung Wong & Chenghu Ma, 2008. "Preferences over location-scale family," Economic Theory, Springer, vol. 37(1), pages 119-146, October.

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