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Living without state-independence of utilities

Author

Listed:
  • Brian Hill

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

This article is concerned with the representation of preferences which do not satisfy the ordinary axioms for state-independent utilities. After suggesting reasons for not being satisfied with solutions involving state-dependent utilities, an alternative representation shall be proposed involving state-independent utilities and a situation-dependent factor. The latter captures the interdependencies between states and consequences. Two sets of axioms are proposed, each permitting the derivation of subjective probabilities, state-independent utilities, and a situation-dependent factor, and each operating in a different framework. The first framework involves the concept of a decision situation—consisting of a set of states, a set of consequences and a preference relation on acts; the probabilities, utilities and situation-dependent factor are elicited by referring to other, appropriate decision situations. The second framework, which is technically related, operates in a fixed decision situation; particular "subsituations" are employed in the derivation of the representation. Possible interpretations of the situation-dependent factor and the notion of situation are discussed.

Suggested Citation

  • Brian Hill, 2009. "Living without state-independence of utilities," Post-Print hal-00463428, HAL.
  • Handle: RePEc:hal:journl:hal-00463428
    DOI: 10.1007/s11238-008-9127-x
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00463428
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    References listed on IDEAS

    as
    1. Karni, Edi & Schmeidler, David, 1993. "On the Uniqueness of Subjective Probabilities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 267-277, April.
    2. Edi Karni & Philippe Mongin, 2000. "On the Determination of Subjective Probability by Choices," Management Science, INFORMS, vol. 46(2), pages 233-248, February.
    3. Karni, Edi, 2007. "Foundations of Bayesian theory," Journal of Economic Theory, Elsevier, vol. 132(1), pages 167-188, January.
    4. Kenneth R. MacCrimmon & Donald A. Wehrung, 1990. "Characteristics of Risk Taking Executives," Management Science, INFORMS, vol. 36(4), pages 422-435, April.
    5. Hill, Brian, 2007. "Three analyses of sour grapes," HEC Research Papers Series 873, HEC Paris.
    6. Karni, Edi, 1996. "Probabilities and Beliefs," Journal of Risk and Uncertainty, Springer, vol. 13(3), pages 249-262, November.
    7. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2006. "Interactive unawareness," Journal of Economic Theory, Elsevier, vol. 130(1), pages 78-94, September.
    8. HILL, Brian, 2006. "Towards a "sophisticated" model of belief dynamics," HEC Research Papers Series 868, HEC Paris.
    9. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, Oxford University Press, vol. 91(1), pages 143-156.
    10. Brian Hill, 2007. "Dynamic Awareness," Working Papers hal-00582666, HAL.
    11. Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, March.
    12. Karni Edi, 1993. "Subjective Expected Utility Theory with State-Dependent Preferences," Journal of Economic Theory, Elsevier, vol. 60(2), pages 428-438, August.
    13. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    14. Karni, Edi & Schmeidler, David & Vind, Karl, 1983. "On State Dependent Preferences and Subjective Probabilities," Econometrica, Econometric Society, vol. 51(4), pages 1021-1031, July.
    15. Karni, Edi, 1993. "A Definition of Subjective Probabilities with State-Dependent Preferences," Econometrica, Econometric Society, vol. 61(1), pages 187-198, January.
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    More about this item

    Keywords

    Elicitation; Subjective probability; Subjective expected utility; State-dependent utility; Small worlds;

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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