Decision Analysis Using Lottery-Dependent Utility

Joao L Becker and Rakesh K Sarin

Journal of Risk and Uncertainty, 1989, vol. 2, issue 1, 105-17

Abstract: In this article we show how the lottery-dependent expected utility (LDEU) model can be used in decision analysis. The LDEU model is an extension of the classical expected utility (EU) model and yet permits preference patterns that are infeasible in the EU model. We propose a framework of constructing decision trees in a particular way that permits us to use the principle of optimality and thus the divide and conquer strategy for analyzing complex problems using the LDEU model. Our approach may be applicable to some other nonlinear utility models as well. The result is that, if desired, decision analysis can be conducted without assuming the restrictive substitution principle/independence axiom. Copyright 1989 by Kluwer Academic Publishers

Date: 1989
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