A Simple Behavioral Characterization of Subjective Expected Utility
Operations Research · 2013 · Volume 61 · Issue 4
Abstract
Subjective expected utility is the most widely used model to represent preferences under uncertainty (when objective probabilities of events may not be known). This paper presents a new behavioral characterization (preference axiomatization) of subjective expected utility. The latter is derived from a behavioral assumption of cardinal independence, also known as standard sequence invariance. This axiom requires that a standard sequence of outcomes (equally spaced in terms of utility) is independent of the conditional event. This axiom is a weaker version of the trade-off consistency condition of Wakker [Wakker PP (1984) Cardinal coordinate independence for expected utility. J. Math. Psych. 28:110–117]. The main representation theorem is derived both in the connected topology approach and the algebraic approach (when step-continuity is replaced with solvability and Archimedean axioms).
Keywords
subjective uncertainty, ambiguity, subjective expected utility, trade-off consistency, connected topology approach, algebraic approach
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