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Understanding the nonadditive probability decision model (*)

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  • Sujoy Mukerji

    (Department of Economics, University of Southampton, Highfield, Southampton S017 1BJ, UK e-mail:sm5Gsoton.ac.uk)

Abstract

The pioneering research of Schmeidler [19] [20] and others identified behavioral axioms that underlie preferences consistent with the maximization of Choquet expected utility. However, these theories do not clarify the link between the epistemics of the decision maker's (DM) problem and his choice. This paper shows that if the DM is aware that his anticipation and perception of future contingencies is incomplete, then his subjective beliefs will be described by a nonadditive probability specification. Further, if the DM acts with a certain notion of caution given the incompleteness in his understanding of the environment, his preferences over acts may have a Choquet expected utility representation. The model developed here thus provides a justification of such beliefs and preferences based on "procedural rationality". The formalism also allows a simple characterization of how belief representation may change as the DM acquires a clearer picture of the contingency space underlying the uncertain environment.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 9 (1996)
Issue (Month): 1 ()
Pages: 23-46

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Handle: RePEc:spr:joecth:v:9:y:1996:i:1:p:23-46

Note: Received: April 6, 1995; revised version November 27, 1995
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References

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  1. Welfe, Aleksander, 1991. " Modelling Wages in Centrally Planned Economies: The Case of Poland," Economic Change and Restructuring, Springer, vol. 24(1), pages 47-58.
  2. repec:sae:niesru:v:111:y::i:1:p:62-85 is not listed on IDEAS
  3. Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998. "Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 533-572, December.
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  5. Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
  6. Christopher Erickson & Andrea Ichino, 1995. "Wage Differentials in Italy: Market Forces, Institutions, and Inflation," NBER Chapters, in: Differences and Changes in Wage Structures, pages 265-306 National Bureau of Economic Research, Inc.
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  8. Roberto Golinelli & Renzo Orsi, 1994. "Price-Wage Dynamics is A Transition Economy: The Case of Poland," Working Papers 192, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
  10. Clements, Michael P. & Mizon, Grayham E., 1991. "Empirical analysis of macroeconomic time series : VAR and structural models," European Economic Review, Elsevier, vol. 35(4), pages 887-917, May.
  11. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
  12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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Cited by:
  1. Jürgen Eichberger & David Kelsey, 1999. "E-Capacities and the Ellsberg Paradox," Theory and Decision, Springer, vol. 46(2), pages 107-138, April.
  2. Adriana Castaldo & Massimo Marinacci, 2001. "Random correspndences as bundles of random variables," ICER Working Papers - Applied Mathematics Series 12-2001, ICER - International Centre for Economic Research.
  3. Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
  4. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
  5. Roman Kozhan, 2011. "Non-additive anonymous games," International Journal of Game Theory, Springer, vol. 40(2), pages 215-230, May.
  6. Marcello Basili & Carlo Zappia, 2010. "Ambiguity and uncertainty in Ellsberg and Shackle," Cambridge Journal of Economics, Oxford University Press, vol. 34(3), pages 449-474.
  7. Larry Epstein & Massimo Marinacci, 2005. "Coarse Contingencies," RCER Working Papers 515, University of Rochester - Center for Economic Research (RCER).
  8. MacLaren, D., 1995. "Uncertainty AVersion and Technical Barriers to Trade: An Australian Example," Department of Economics - Working Papers Series 498, The University of Melbourne.
  9. Grant, S. & Quiggin, J., 2001. "A Model-Free Definition of Increasing Uncertainty," Discussion Paper 2001-84, Tilburg University, Center for Economic Research.
  10. Marie-Louise Vierø, 2009. "Exactly what happens after the Anscombe–Aumann race?," Economic Theory, Springer, vol. 41(2), pages 175-212, November.
  11. Spyros Galanis, 2013. "Unawareness of theorems," Economic Theory, Springer, vol. 52(1), pages 41-73, January.
  12. Vassili Vergopoulos, 2011. "Dynamic consistency for non-expected utility preferences," Economic Theory, Springer, vol. 48(2), pages 493-518, October.
  13. Luca Rigotti & Matthew Ryan & Rhema Vaithianathan, 2011. "Optimism and firm formation," Economic Theory, Springer, vol. 46(1), pages 1-38, January.
  14. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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