Preference for Flexibility in a Savage Framework
Econometrica · 1999 · Volume 67 · Issue 1
Abstract
We study preferences over Savage acts that map states to opportunity sets and satisfy the Savage axioms. Preferences over opportunity sets may exhibit apreference for flexibilitydue to an implicit uncertainty about future preferences reflecting anticipated unforeseen contingencies. The main result of this paper characterizes maximization of the expected indirect utility in terms of an ‘Indirect Stochastic Dominance’ axiom that expresses a preference for ‘more opportunities in expectation.’ The key technical tool of the paper, a version of Möbius inversion, has been imported from the theory of nonadditive belief functions; it allows an alternative representation using Choquet integration, and yields a simple proof of Kreps' (1979) classic result.
Keywords
Dynamic decision making, expected utility, unforeseen contingencies, opportunity set, option value, Möbius inverse.
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