A Non-Bayesian Theory of State-Dependent Utility
Econometrica · 2019 · Volume 87 · Issue 4
Abstract
Many decision situations involve two or more of the following divergences from subjective expected utility: imprecision of beliefs (or ambiguity), imprecision of tastes (or multi-utility), and state dependence of utility. This paper proposes and characterizes a model of uncertainty averse preferences that can simultaneously incorporate all three phenomena. The representation supports a principled separation of (imprecise) beliefs and (potentially state-dependent, imprecise) tastes. Moreover, the representation permits comparative statics separating the roles of beliefs and tastes, and is modular: it easily delivers special cases involving various combinations of the phenomena, as well as state-dependent multi-utility generalizations covering popular ambiguity models.
Keywords
State-dependent utility, uncertainty aversion, multiple priors, ambiguity, imprecise tastes, multi-utility
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