Cautious Expected Utility and the Certainty Effect

Simone Cerreia-Vioglio, David Dillenberger () and Pietro Ortoleva
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David Dillenberger: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Many violations of the Independence axiom of Expected Utility can be traced to subjects' attraction to risk-free prospects. Negative Certainty Independence, the key axiom in this paper, formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy Negative Certainty Independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how risk averse to be when evaluating a lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a well-defined sense. We show that our representation can also be derived from a `cautious' completion of an incomplete preference relation.

Keywords: Preferences under risk; Allais paradox; Negative Certainty Independence; Incomplete preferences; Cautious Completion; Multi-Utility representation. (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2013-07-09
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Cautious Expected Utility and the Certainty Effect (2015)
Working Paper: Cautious Expected Utility and the Certainty Effect (2014)
Working Paper: Cautious Expected Utility and the Certainty Effect (2013)
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