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Induced Preferences and Decision-Making Under Risk and Uncertainty

  • Frank Milne
  • David Kelsey

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".

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File Function: First version 1994
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 897.

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Length: 24 pages
Date of creation: Jan 1994
Date of revision:
Handle: RePEc:qed:wpaper:897
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