An Essential Analogy Between Coherent Previsions of Random Gains and Well-Behaved Preferences

Angelini Pierpaolo and Angela De Sanctis

International Journal of Statistics and Probability, 2019, vol. 8, issue 3, 46

Abstract: We deal with a unified approach to an integrated and simplified formulation of the decision-making theory in its two subjective components, probability and utility. We show a choice model based on an application of fundamental microeconomic principles to the two-dimensional convex set of all coherent previsions of two random gains. Such a model is well-founded because we find out an analogy between properties of well-behaved preferences and the ones of coherent previsions of random gains. Coherence properties of the notion of price or prevision of a random gain are based on economic criteria of the decision-making theory. In particular, additivity property of price tells us that our decision-maker is not risk-averse but he is risk-neutral. Therefore, the certain gain equivalent to a random gain coincides with a coherent price of this random gain.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ibn:ijspjl:v:8:y:2019:i:3:p:46

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