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Vector Expected Utility and Attitudes Toward Variation

  • Marciano Siniscalchi

This paper proposes a model of decision under ambiguity deemed vector expected utility, or VEU. In this model, an uncertain prospect, or Savage act, is assessed according to (a) a baseline expected-utility evaluation, and (b) an adjustment that reflects the individual's perception of ambiguity and her attitudes toward it. The adjustment is itself a function of the act's exposure to distinct sources of ambiguity, as well as its variability. The key elements of the VEU model are a baseline probability and a collection of random variables, or adjustment factors, which represent acts exposed to distinct ambiguity sources and also reflect complementarities among ambiguous events. The adjustment to the baseline expected-utility evaluation of an act is a function of the covariance of its utility profile with each adjustment factor, which reflects exposure to the corresponding ambiguity source. Copyright 2009 The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 77 (2009)
Issue (Month): 3 (05)
Pages: 801-855

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Handle: RePEc:ecm:emetrp:v:77:y:2009:i:3:p:801-855
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