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Many studies document failures of expected utility’s key assumption, the independence axiom. Here, we show that independence can be decomposed into two distinct axioms - betweenness and homotheticity - and that these two axioms are necessary and sufficient for independence. Thus, independence...
Persistent link: https://www.econbiz.de/10010430733
We study axiomatically the problem of obtaining an expected utility representation for a potentially incomplete preference relation over lotteries by means of a set of von Neumann-Morgenstern utility functions. It is shown that, when the prize space is a compact metric space, a preference...
Persistent link: https://www.econbiz.de/10014076197
In Arrow's seminal analysis of optimal risk bearing in which he introduced contingent claim securities, he assumed preferences were representable by a state independent Expected Utility function. Although the classic contingent claim setting assumes agents choose over contingent consumption...
Persistent link: https://www.econbiz.de/10013050017
Consider a finite data set where each observation consists of a bundle of contingent consumption chosen by an agent from a constraint set of such bundles. We develop a general procedure for testing the consistency of this data set with a broad class of models of choice under risk and under...
Persistent link: https://www.econbiz.de/10011345795
Although there are alternative models which can explain the Allais paradox with non-standard preferences, they do not take the emerging evidence on preference imprecision into account. The imprecision is so far incorporated into these models by adding a stochastic specification implying the...
Persistent link: https://www.econbiz.de/10012990667
We investigate the origin of stochastic choice and differentiate between three classes of models that account for it: Random Utility, Bounded Rationality, and Deliberate Randomization. We conduct an experiment in which subjects face the same questions repeated multiple times, but we consider...
Persistent link: https://www.econbiz.de/10013017580
Among the reasons behind the choice behavior of an individual taking a stochastic form are her potential indifference or indecisiveness between certain alternatives, and/or her willingness to experiment in the sense of occasionally deviating from choosing a best alternative in order to give a...
Persistent link: https://www.econbiz.de/10013273770
I provide axiomatic foundations for a model of taste uncertainty with endogenous learning through consumption. In this setting, uncertainty is over an unobservable, subjective state space. Preference over lottery–menu pairs is sufficient to identify the state space and the learning process. In...
Persistent link: https://www.econbiz.de/10011744296
We characterize optimal consumption policies in a recursive intertemporal utility framework with local substitution. We establish existence and uniqueness and a version of the Kuhn-Tucker theorem characterizing the optimal consumption plan. An explicit solution is provided for the case when the...
Persistent link: https://www.econbiz.de/10013445441
This paper introduces the random discounted expected utility (RDEU) model, which we have developed as a means to deal with heterogeneous risk and time preferences. The RDEU model provides an explicit linkage between preference and choice heterogeneity. We prove it has solid comparative statics,...
Persistent link: https://www.econbiz.de/10014577706