Subjective Expected Utility Theory with "Small Worlds"
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- DP 09-26
Final published version, 482 KB, PDF document
We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models.
Original language | English |
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Publisher | Department of Economics, University of Copenhagen |
Number of pages | 22 |
Publication status | Published - 2009 |
- Faculty of Social Sciences - decision making under uncertainty, uncertainty aversion, Ellsberg paradox
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ID: 16276798