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Induced Preferences, Nonadditive Beliefs, and Multiple Priors

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  • Kelsey, David
  • Milne, Frank

Abstract

We study a decision maker who follows the Savage axioms. We show that if he or she is able to take unobservable actions that influence the probabilities of outcomes, then it can appear to an outsider as if his or her subjective probabilities are nonadditive. Implications for multiperiod decision are explored. We extend the model to include a second individual who is also able to take a hidden action. We show that this may induce uncertainty-averse preferences over some class of acts, even if the second individual acts to help the decision maker with high probability. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Kelsey, David & Milne, Frank, 1999. "Induced Preferences, Nonadditive Beliefs, and Multiple Priors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 455-477, May.
  • Handle: RePEc:ier:iecrev:v:40:y:1999:i:2:p:455-77
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    Cited by:

    1. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics.
    2. Spanjers, Willy, 2008. "Central banks and ambiguity," International Review of Economics & Finance, Elsevier, vol. 17(1), pages 85-102.

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