Preference Paradox and Nonlinear Expected Utility Theory

Kazuhisa Takemura
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Kazuhisa Takemura: Waseda University

Chapter Chapter 8 in Behavioral Decision Theory, 2021, pp 101-115 from Springer

Abstract: Abstract Chapter 7 explained that expected utility theoryExpected utility theory included counterexamples called the Allais paradoxAllais paradox (Allais, 1953) and[aut]Allais, M. the Ellsberg[aut]Ellsberg, D. paradox (Ellsberg, 1961). The Allais and Ellsberg paradoxesEllsberg paradox are interpreted as deviations from the independence axiomIndependence axiom. This chapter first explains the relations between these paradoxes and the independence axiomIndependence axiom. In recent years, these paradoxes have become explainable using such theory systemsNonlinear utility theory called nonlinear utility theory[aut]Edwards, W. (Fishburn, 1988; Edwards, 1992), which[aut]Fishburn, P. C. does not assume this independence axiomAxiom, and generalized expected utility theoryGeneralized expected utility theory (Quiggin, 1993). Prospect[aut]Quiggin, J. theory as proposed by Kahneman[aut]Kahneman, D. and Tversky[aut]Tversky, A. (1979), Tversky and Kahneman[aut]Kahneman, D. (1992) is a theory that particularly integrates knowledge and past findings in behavioral decision-making theory and nonlinear utility theory (or generalized expected utility theoryGeneralized expected utility theory). This chapter explains the idea of non-additive probabilityNon-additive probability assumed in nonlinear utility theoryNonlinear utility theory and the expected utility based on such non-additive probabilityProbability. The chapter finally describes the basic assumptions in prospect theoryProspect theory.

Keywords: Subjective probability; Utility theory; Prospect theory; Expect utility theory; Nonlinear expected utility theory “expected utility theory” (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-16-5453-4_8

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DOI: 10.1007/978-981-16-5453-4_8

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