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Subjective Expected Utility Theory with “Small Worlds”

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Author Info

  • Jacob Gyntelberg

    (Bank for International Settlements)

  • Frank Hansen

    (Department of Economics, University of Copenhagen)

Abstract

We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 09-26.

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Length: 22 pages
Date of creation: Aug 2004
Date of revision: Dec 2009
Handle: RePEc:kud:kuiedp:0926

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Related research

Keywords: subjective expected utility; decision making under uncertainty; uncertainty aversion; Ellsberg paradox;

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