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Induced Preferences and Decision-Making Under Risk and Uncertainty

Author

Listed:
  • Frank Milne
  • David Kelsey

Abstract

In this paper we suggest a new interpretation of non-additive probabilities. We study a decision-maker who follows the Savage axioms. We show the if (s)he is able to take unobservable actions which influence the probabilities of outcomes then it can appear to an outsider as if the his/her subjective probabilities are non-additive. We make a related analysis of models with objective probabilities and show that the induced preferences can have the rank dependent expected utility form. Implications for multi-period decisions are explored. We show that such preferences are not vulnerable to "Dutch books".

Suggested Citation

  • Frank Milne & David Kelsey, 1994. "Induced Preferences and Decision-Making Under Risk and Uncertainty," Working Papers 897, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:897
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_897.pdf
    File Function: First version 1994
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    Cited by:

    1. Stephen Morris, 1997. "Risk, uncertainty and hidden information," Theory and Decision, Springer, vol. 42(3), pages 235-269, May.

    More about this item

    Keywords

    uncertainty aversion; induced preferences; Dutch Book; rank dependent expected utility;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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