SUBJECTIVE PROBABILITY AND EXPECTED UTILITY
David Schmeidleis
Abstract
David Schmeidleis
Abstract
An act maps states of nature to outcomes; deterministic outcomes as well as random outcomes are included. Two acts f and g are comonotonic, by definition, if it never happens that f(s) >- f(t) and g(t) >- g(s) for some states of nature s and t. An axiom of comonotonic independence is introduced here. It weakens the von Neumann-Morgenstern axiom of independence as follows: If f >- g and if f, g, and h are comonotonic, then cff +(l-a)h>-ag+(1 -ac)h. If a nondegenerate, continuous, and monotonic (state independent) weak order over acts satisfies comonotonic independence, then it induces a unique non-(necessarily-)additive probability and a von Neumann-Morgenstern utility. Furthermore, one can compute the expected utility of an act with respect to the nonadditive probability, using the Choquet integral. This extension of the expected utility theory covers situations, as the Ellsberg paradox, which are inconsistent with additive expected utility. The concept of uncertainty aversion and interpretation of comonotonic independence in the context of social welfare functions are included.
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An act maps states of nature to outcomes; deterministic outcomes as well as random outcomes are included. Two acts f and g are comonotonic, by definition, if it never happens that f(s) >- f(t) and g(t) >- g(s) for some states of nature s and t. An axiom of comonotonic independence is introduced here. It weakens the von Neumann-Morgenstern axiom of independence as follows: If f >- g and if f, g, and h are comonotonic, then cff +(l-a)h>-ag+(1 -ac)h. If a nondegenerate, continuous, and monotonic (state independent) weak order over acts satisfies comonotonic independence, then it induces a unique non-(necessarily-)additive probability and a von Neumann-Morgenstern utility. Furthermore, one can compute the expected utility of an act with respect to the nonadditive probability, using the Choquet integral. This extension of the expected utility theory covers situations, as the Ellsberg paradox, which are inconsistent with additive expected utility. The concept of uncertainty aversion and interpretation of comonotonic independence in the context of social welfare functions are included.
Key concepts: Von Neumann–Morgenstern utility theorem, Expected utility hypothesis, Mathematical economics, Subjective expected utility, Axiom, Isoelastic utility, Von Neumann architecture, Axiom independence