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Subjective expected utility with a spectral state space

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  • Marcus Pivato

    (Université de Cergy-Pontoise)

Abstract

An agent faces a decision under uncertainty with the following structure. There is a set $${\mathcal {A}}$$A of “acts”; each will yield an unknown real-valued payoff. Linear combinations of acts are feasible; thus, $${\mathcal {A}}$$A is a vector space. But there is no pre-specified set of states of nature. Instead, there is a Boolean algebra $${\mathfrak {I}}$$I describing information the agent could acquire. For each element of $${\mathfrak {I}}$$I, she has a conditional preference order on $${\mathcal {A}}$$A. I show that if these conditional preferences satisfy certain axioms, then there is a unique compact Hausdorff space $${\mathcal {S}}$$S such that elements of $${\mathcal {A}}$$A correspond to continuous real-valued functions on $${\mathcal {S}}$$S, elements of $${\mathfrak {I}}$$I correspond to regular closed subsets of $${\mathcal {S}}$$S, and the conditional preferences have a subjective expected utility (SEU) representation given by a Borel probability measure on $${\mathcal {S}}$$S and a continuous utility function. I consider two settings; in one, $${\mathcal {A}}$$A has a partial order making it a Riesz space or Banach lattice, and $${\mathfrak {I}}$$I is the Boolean algebra of bands in $${\mathcal {A}}$$A. In the other, $${\mathcal {A}}$$A has a multiplication operator making it a commutative Banach algebra, and $${\mathfrak {I}}$$I is the Boolean algebra of regular ideals in $${\mathcal {A}}$$A. Finally, given two such vector spaces $${\mathcal {A}}_1$$A1 and $${\mathcal {A}}_2$$A2 with SEU representations on topological spaces $${\mathcal {S}}_1$$S1 and $${\mathcal {S}}_2$$S2, I show that a preference-preserving homomorphism $${\mathcal {A}}_2{{\longrightarrow }}{\mathcal {A}}_1$$A2⟶A1 corresponds to a probability-preserving continuous function $${\mathcal {S}}_1{{\longrightarrow }}{\mathcal {S}}_2$$S1⟶S2. I interpret this as a model of changing awareness.

Suggested Citation

  • Marcus Pivato, 2020. "Subjective expected utility with a spectral state space," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(2), pages 249-313, March.
  • Handle: RePEc:spr:joecth:v:69:y:2020:i:2:d:10.1007_s00199-018-01173-5
    DOI: 10.1007/s00199-018-01173-5
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    References listed on IDEAS

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    Cited by:

    1. Marcus Pivato, 2021. "Intertemporal Choice with Continuity Constraints," Mathematics of Operations Research, INFORMS, vol. 46(3), pages 1203-1229, August.
    2. Pivato, Marcus & Vergopoulos, Vassili, 2020. "Subjective expected utility with imperfect perception," Journal of Mathematical Economics, Elsevier, vol. 88(C), pages 104-122.
    3. Simon Grant & Idione Meneghel & Rabee Tourky, 2022. "Learning under unawareness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 447-475, September.
    4. Anastasia Burkovskaya, 2022. "A model of state aggregation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 121-149, February.

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    More about this item

    Keywords

    Subjective expected utility; Awareness; Subjective state space; Riesz space; Banach lattice; Commutative Banach algebra;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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