Event Valence and Subjective Probability

Adam Brandenburger, Paolo Ghirardato, Daniele Pennesi and Lorenzo Stanca

Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: In the world of subjective probability, there is no a priori reason why probabilities — interpreted as a willingness-to-bet—should necessarily lie in the interval [0, 1]. We weaken the Monotonicity axiom in classical subjective expected utility (Anscombe and Aumann, 1963) to obtain a representation of preferences in terms of an affine utility function and a signed (subjective) probability measure on states. We decompose this probability measure into a non-negative probability measure (“probability†) and an additive set function on states which sums to zero (“valence†). States with positive (resp. negative) valence are attractive (resp. aversive) for the decision maker. We show how our decision theory can resolve several paradoxes in decision theory, including “hedging aversion†(Morewedge et al., 2018), the conjunction effect (Tversky and Kahneman, 1982, 1983), the co-existence of insurance and betting (Friedman and Savage, 1948), and the choice of dominated strategies in strategyproof mechanisms (Hassidim et al., 2016). We extend our theory to allow for a non-additive willingness-to-bet, which also relaxes our earlier constraints on how valence can behave.

Keywords: Signed probabilities; non-monotonicity; indifference substitution; valence; attractive and aversive states (search for similar items in EconPapers)
Pages: 38 pages
Date: 2024
New Economics Papers: this item is included in nep-dcm, nep-mic and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:717

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