A Theory of Coarse Utility

Liping Liu and Prakash P Shenoy

Journal of Risk and Uncertainty, 1995, vol. 11, issue 1, 17-49

Abstract: This article presents a descriptive theory for complex choice problems. In line with the bounded rationality assumption, we hypothesize that decision makers modify a complex choice into some coarse approximations, each of which is a binary lottery. We define the value of a best coarse approximation to be the utility of the choice. Using this paradigm, we axiomatize and justify a new utility function called the "coarse utility function." We show that the coarse utility function approximates the rank- and sign-dependent utility function. It satisfies dominance but admits violations of independence. It reduces judgmental load and allows flexible judgmental information. It accommodates phenomena associated with probability distortions and provides a better resolution to the St. Petersburg paradox than the expected and rank-dependent theories. Copyright 1995 by Kluwer Academic Publishers

Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jrisku:v:11:y:1995:i:1:p:17-49

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