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Expected utility with ambiguous probabilities and ‘irrational’ parameters

✍ Scribed by Günter Franke

Publisher
Springer US
Year
1978
Tongue
English
Weight
735 KB
Volume
9
Category
Article
ISSN
0040-5833

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✦ Synopsis

Savage's expected utility theory has been criticized for various reasons. Two of these are: (1) Subjective probabilities may be more or less ambiguous; this may affect the preference order. Savage's theory rules out any such effect. (2) Savage's theory rules out any influence of certain parameters of a probability distribution on the preference order. Such parameters are fractiles or pairs of fractiles, e.g., which have gained widespread attention as risk measures.

This paper generalizes expected utility theory to include effects of ambiguity and those parameters on the preference order. Basic to this generalization is the classic paper by Herstein/Milnor.

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