Vector Expected Utility and Attitudes Toward Variation

Econometrica · 2009 · Volume 77 · Issue 3

Abstract

This paper proposes a model of decision under ambiguity deemedvector expected utility, or VEU. In this model, an uncertain prospect, or Savage act, is assessed according to (a) abaseline expected-utility evaluation, and (b) anadjustmentthat reflects the individual's perception of ambiguity and her attitudes toward it. The adjustment is itself a function of the act's exposure to distinct sources of ambiguity, as well as its variability. The key elements of the VEU model are a baseline probability and a collection of random variables, oradjustment factors, which represent acts exposed to distinct ambiguity sources and also reflect complementarities among ambiguous events. The adjustment to the baseline expected-utility evaluation of an act is a function of the covariance of its utility profile with each adjustment factor, which reflects exposure to the corresponding ambiguity source. A behavioral characterization of the VEU model is provided. Furthermore, an updating rule for VEU preferences is proposed and characterized. The suggested updating rule facilitates the analysis of sophisticated dynamic choice with VEU preferences.

Keywords

Ambiguity, attitudes toward variability, reference prior

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