Vector Expected Utility and Attitudes Toward Variation

This paper proposes a model of decision under ambiguity deemed vector expected utility, or VEU. In this model, an uncertain prospect, or Savage act, is assessed according to (a) a baseline expected-utility evaluation, and (b) an adjustment that reflects the individual's perception of ambiguity and her attitudes toward it. The adjustment is itself a function of the act's exposure to distinct sources of ambiguity, as well as its variability. The key elements of the VEU model are a baseline probability and a collection of random variables, or adjustment factors, which represent acts exposed to distinct ambiguity sources and also reflect complementarities among ambiguous events. The adjustment to the baseline expected-utility evaluation of an act is a function of the covariance of its utility profile with each adjustment factor, which reflects exposure to the corresponding ambiguity source. Copyright 2009 The Econometric Society.