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Vector-Adjusted Expected Utility

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  • Marciano Siniscalchi

Abstract

This paper proposes a representation of (possibly) probabilistically unsophisticated preferences whereby (1) beliefs are jointly represented by a finitely additive probability measure and a vector-valued measure; (2) uncertain prospects are ranked according to the difference between a baseline expected utility evaluation and an adjustment term; and (3) the latter is the norm of the vector-valued expected utility of the prospect under consideration. Vector-valued measures are employed to represent the extent to which ambiguity about different events “cancels out” or “adds up”, as revealed by the decision maker’s preferences. The proposed representation, vector-adjusted expected utility (VEU), is shown to be consistent with the maxmin-expected utility model (MEU). A necessary and sufficient condition characterizing the class of VEU preferences within the MEU family of preferences is provided.

Suggested Citation

  • Marciano Siniscalchi, "undated". "Vector-Adjusted Expected Utility," Working Papers 191, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:191
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    File URL: ftp://ftp.igier.uni-bocconi.it/wp/2001/191.pdf
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    References listed on IDEAS

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    1. Machina Mark J. & Schmeidler David, 1995. "Bayes without Bernoulli: Simple Conditions for Probabilistically Sophisticated Choice," Journal of Economic Theory, Elsevier, vol. 67(1), pages 106-128, October.
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    6. Casadesus-Masanell, Ramon & Klibanoff, Peter & Ozdenoren, Emre, 2000. "Maxmin Expected Utility over Savage Acts with a Set of Priors," Journal of Economic Theory, Elsevier, vol. 92(1), pages 35-65, May.
    7. F J Anscombe & R J Aumann, 2000. "A Definition of Subjective Probability," Levine's Working Paper Archive 7591, David K. Levine.
    8. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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    12. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    13. Epstein, L.G. & Zhang, J., 1998. "Subjective Probabilities on Subjectivity Unambiguous Event," RCER Working Papers 456, University of Rochester - Center for Economic Research (RCER).
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    Cited by:

    1. Castagnoli, Erio & Maccheroni, Fabio & Marinacci, Massimo, 2002. "Insurance premia consistent with the market," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 267-284, October.
    2. Siniscalchi, Marciano, 2006. "A behavioral characterization of plausible priors," Journal of Economic Theory, Elsevier, vol. 128(1), pages 91-135, May.

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