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An expected utility theory for state-dependent preferences

Edi Karni and David Schmeidler ()

Theory and Decision, 2016, vol. 81, issue 4, 467-478

Abstract: Abstract This note is a generalization and improved interpretation of the main result of Karni and Schmeidler (An Expected utility theory for state-dependent preferences. Working paper no. 48-80 of the Foerder Institute for Economic Research, Faculty of Social Sciences, Tel Aviv University, 1980). A decision-maker is supposed to possess a preference relation on acts and another preference relation on state-prize lotteries, both of which are assumed to satisfy the von Neumann–Morgenstern axioms. In addition, the two preference relations restricted to a state of nature are assumed to agree. We show that these axioms are necessary and sufficient for the existence of subjective expected utility over acts with state-dependent utility functions and a subjective probability measure. This subjective probability measure is unique when conditioned on the set of states of nature in which not all the prizes are equally desirable.

Keywords: Subjective expected utility; State-dependent preferences; State-dependent utility; Subjective probabilities (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:kap:theord:v:81:y:2016:i:4:d:10.1007_s11238-016-9545-0