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Understanding the nonadditive probability decision model

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  • Mukerji, S.

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

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9517.

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Date of creation: 01 Jan 1995
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Handle: RePEc:stn:sotoec:9517

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References

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  1. Christopher L. Erikson & Andrea Ichino, 1994. "Wage Differentials in Italy: Market Forces, Institutions, and Inflation," NBER Working Papers 4922, National Bureau of Economic Research, Inc.
  2. Welfe, Aleksander, 1996. " The Price-Wage Inflationary Spiral in Poland," Economic Change and Restructuring, Springer, Springer, vol. 29(1), pages 33-50.
  3. repec:sae:niesru:v:111:y::i:1:p:62-85 is not listed on IDEAS
  4. Roberto Golinelli & Renzo Orsi, 1996. "Exchange rate Inflation and Unemployment in East European Economies: the Case of Poland and Hungary," Working Papers 265, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998. " Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 12(5), pages 533-72, December.
  6. Welfe, Aleksander, 1991. " Modelling Wages in Centrally Planned Economies: The Case of Poland," Economic Change and Restructuring, Springer, Springer, vol. 24(1), pages 47-58.
  7. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 54(3), pages 383-97, August.
  8. Marcellino, Massimiliano, 1999. "Some Consequences of Temporal Aggregation in Empirical Analysis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 17(1), pages 129-36, January.
  9. Golinelli, Roberto & Orsi, Renzo, 1994. " Price-Wage Dynamics in a Transition Economy: The Case of Poland," Economic Change and Restructuring, Springer, Springer, vol. 27(3), pages 293-313.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  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, Oxford University Press, number 9780198288107, October.
  12. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, Elsevier, vol. 14(4), pages 517-533, August.
  13. Clements, Michael P. & Mizon, Grayham E., 1991. "Empirical analysis of macroeconomic time series : VAR and structural models," European Economic Review, Elsevier, Elsevier, vol. 35(4), pages 887-917, May.
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Cited by:
  1. Galanis, Spyros, 2007. "Unawareness of theorems," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 51816, Economics Division, School of Social Sciences, University of Southampton.
  2. Tallon, Jean-Marc & Dana, Rose-Anne & Chateauneuf, Alain, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/5461, Paris Dauphine University.
  3. Grant, S. & Quiggin, J., 2001. "A Model-Free Definition of Increasing Uncertainty," Discussion Paper, Tilburg University, Center for Economic Research 2001-84, Tilburg University, Center for Economic Research.
  4. Jean-Marc Tallon & Sujoy Mukerji, 2004. "Ambiguity aversion and the absence of wage indexation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174562, HAL.
  5. Marcello Basili & Carlo Zappia, 2010. "Ambiguity and uncertainty in Ellsberg and Shackle," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 34(3), pages 449-474.
  6. Eichberger, J. & Kelsey, D., 1996. "E-Capacities and the Ellsberg Paradox," Discussion Papers, Department of Economics, University of Birmingham 96-13, Department of Economics, University of Birmingham.
  7. Adriana Castaldo & Massimo Marinacci, 2001. "Random correspndences as bundles of random variables," ICER Working Papers - Applied Mathematics Series, ICER - International Centre for Economic Research 12-2001, ICER - International Centre for Economic Research.
  8. Larry Epstein & Massimo Marinacci, 2005. "Coarse Contingencies," RCER Working Papers 515, University of Rochester - Center for Economic Research (RCER).
  9. Marie-Louise Vierø, 2009. "Exactly what happens after the Anscombe–Aumann race?," Economic Theory, Springer, Springer, vol. 41(2), pages 175-212, November.
  10. MacLaren, D., 1995. "Uncertainty AVersion and Technical Barriers to Trade: An Australian Example," Department of Economics - Working Papers Series, The University of Melbourne 498, The University of Melbourne.
  11. Luca Rigotti & Matthew Ryan & Rhema Vaithianathan, 2011. "Optimism and firm formation," Economic Theory, Springer, Springer, vol. 46(1), pages 1-38, January.
  12. Roman Kozhan, 2008. "Non-Additive Anonymous Games," Working Papers, Warwick Business School, Finance Group wp08-04, Warwick Business School, Finance Group.
  13. Vassili Vergopoulos, 2011. "Dynamic consistency for non-expected utility preferences," Economic Theory, Springer, Springer, vol. 48(2), pages 493-518, October.
  14. Nabil I. Al-Najjar & Luciano De Castro, 2010. "Uncertainty, Efficiency and Incentive Compatibility," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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