TY - JOUR

T1 - Expected utility with subjective events

AU - Gyntelberg, Jacob

AU - Hansen, Frank

PY - 2012/11/27

Y1 - 2012/11/27

N2 - We provide a new theory of expected utility with subjective events modeled by a lattice of projections. This approach allows us to capture the notion of a "small world" as a context dependent or local state space embedded into a subjective set of events, the "grand world". For each situation the decision makers' subjective "small world" reflects the events perceived to be relevant for the act under consideration. The subjective set of events need not be representable by a classical state space. Maintaining preference axioms similar in spirit to the classical axioms, we obtain an expected utility representation which is consistent across local state spaces and separates subjective probability and utility. An added benefit is that this alternative expected utility representation allows for an intuitive distinction between risk and uncertainty.

AB - We provide a new theory of expected utility with subjective events modeled by a lattice of projections. This approach allows us to capture the notion of a "small world" as a context dependent or local state space embedded into a subjective set of events, the "grand world". For each situation the decision makers' subjective "small world" reflects the events perceived to be relevant for the act under consideration. The subjective set of events need not be representable by a classical state space. Maintaining preference axioms similar in spirit to the classical axioms, we obtain an expected utility representation which is consistent across local state spaces and separates subjective probability and utility. An added benefit is that this alternative expected utility representation allows for an intuitive distinction between risk and uncertainty.

KW - Decision making under uncertainty

KW - Ellsberg's paradox

KW - Subjective events

KW - Subjective expected utility

KW - Uncertainty aversion

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M3 - Article

AN - SCOPUS:84869794072

VL - 9

SP - 1

EP - 21

JO - Australian Journal of Mathematical Analysis and Applications

JF - Australian Journal of Mathematical Analysis and Applications

SN - 1449-5910

IS - 2

ER -