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Worst-case expected utility

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  • Alon, Shiri

Abstract

The paper presents a model in which a decision maker, having a preference relation over purely subjective acts, slightly deviates from the Subjective Expected Utility decision rule, exhibiting an uncertainty averse behavior á-la Schmeidler (1989). The resulting representation is as if the decision maker adds to the formulation of the problem one new state, representing the occurrence of some unforeseen event. Each Savage act is extended to the new, endogenous state by assigning this state with the worst consequence the act obtains on all other, primitive states. On the extended decision problem a Subjective Expected Utility rule is applied. The representation thus expresses the common practice of a ‘worst-case scenario’ assumption as means to cope with unforeseen contingencies. The model is a special case of the neo-additive capacities model of Chateauneuf, Eichberger and Grant.

Suggested Citation

  • Alon, Shiri, 2015. "Worst-case expected utility," Journal of Mathematical Economics, Elsevier, vol. 60(C), pages 43-48.
    • Handle: RePEc:eee:mateco:v:60:y:2015:i:c:p:43-48
    DOI: 10.1016/j.jmateco.2015.06.017
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    References listed on IDEAS

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    Cited by:

    1. Scott Condie & Lars Stentoft & Marie-Louise Vierø, 2023. "Unawareness Premia," Economics Working Papers 2023-09, Department of Economics and Business Economics, Aarhus University.
    2. Dietz, Simon & Niehörster, Falk, 2020. "Pricing ambiguity in catastrophe risk insurance," LSE Research Online Documents on Economics 106116, London School of Economics and Political Science, LSE Library.
    3. Ha-Huy, Thai & Nguyen, Thi Tuyet Mai, 2022. "Saving and dissaving under Ramsey–Rawls criterion," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    4. Grant Simon & Guerdjikova Ani & Quiggin John, 2021. "Ambiguity and Awareness: A Coherent Multiple Priors Model," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 21(2), pages 571-612, June.
    5. Thai Ha-Huy & Tuyet Mai Nguyen, 2019. "Optimal growth and Ramsey-Rawls criteria," Documents de recherche 19-02, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    6. Karni, Edi & Vierø, Marie-Louise, 2017. "Awareness of unawareness: A theory of decision making in the face of ignorance," Journal of Economic Theory, Elsevier, vol. 168(C), pages 301-328.
    7. Adam Dominiak & Ani Guerdjikova, 2021. "Pessimism and optimism towards new discoveries," Theory and Decision, Springer, vol. 90(3), pages 321-370, May.
    8. Vierø, Marie-Louise, 2021. "An intertemporal model of growing awareness," Journal of Economic Theory, Elsevier, vol. 197(C).
    9. Pivato, Marcus & Vergopoulos, Vassili, 2017. "Subjective expected utility representations for Savage preferences on topological spaces," MPRA Paper 77359, University Library of Munich, Germany.
    10. Pivato, Marcus & Vergopoulos, Vassili, 2018. "Subjective expected utility with topological constraints," MPRA Paper 85749, University Library of Munich, Germany.
    11. Dominiak, Adam & Tserenjigmid, Gerelt, 2022. "Ambiguity under growing awareness," Journal of Economic Theory, Elsevier, vol. 199(C).
    12. Simon Dietz & Falk Niehörster, 2021. "Pricing ambiguity in catastrophe risk insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(2), pages 112-132, September.

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