Subjective Expected Utility Theory with “Small Worlds”

Jacob Gyntelberg and Frank Hansen
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Frank Hansen: Department of Economics, University of Copenhagen

No 09-26, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models.

Keywords: subjective expected utility; decision making under uncertainty; uncertainty aversion; Ellsberg paradox (search for similar items in EconPapers)
JEL-codes: D8 G12 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2004-08, Revised 2009-12
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0926

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