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Optimism and Pessimism with Expected Utility, Fifth Version

David Dillenberger (), Andrew Postlewaite () and Kareen Rozen ()
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David Dillenberger: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Maximizing subjective expected utility is the classic model of decision making under uncertainty. Savage (1954) provides axioms on preference over acts that are equivalent to the existence of a subjective expected utility representation, and further establishes that such a representation is essentially unique. We show that there is a continuum of other \expected utility" representations in which the probability distributions over states used to evaluate acts depend on the set of possible outcomes of the act and suggest that these alternate representations can capture pessimism or optimism. We then extend the DM's preferences to be defined over both subjective acts and objective lotteries, allowing for source-dependent preferences. Our result permits modeling ambiguity aversion in Ellsberg's two-urn experiment using a single utility function and pessimistic probability assessments over prizes for lotteries and acts, while maintaining the axioms of Savage and von Neumann-Morganstern on the appropriate domains.

Keywords: Subjective expected utility; optimism; pessimism; stake-dependent probability (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ltv, nep-mic and nep-upt
Date: 2013-11-01, Revised 2015-02-23
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