TY - CHAP

T1 - Lexicographic probabilities and choice under uncertainty

AU - Blume, Lawrence

AU - Brandenburger, Adam

AU - Dekel, Eddie

N1 - Publisher Copyright:
© 2014 World Scientific Publishing Co. Pte. Ltd.

PY - 2023/9/1

Y1 - 2023/9/1

N2 - Two properties of preferences and representations for choice under uncertainty which play an important role in decision theory are: (i) admissibility, the requirement that weakly dominated actions should not be chosen; and (ii) the existence of well defined conditional probabilities, that is, given any event a conditional probability which is concentrated on that event and which corresponds to the individual's preferences. The conventional Bayesian theory of choice under uncertainty, subjective expected utility (SEU) theory, fails to satisfy these properties - weakly dominated acts may be chosen, and the usual definition of conditional probabilities applies only to nonnull events. This chapter develops a non-Archimedean variant of SEU where decision makers have lexicographic beliefs; that is, there are (first-order) likely events as well as (higher-order) events which are infinitely less likely but not necessarily impossible. This generalization of preferences, from those having an SEU representation to those having a representation with lexicographic beliefs, can be made to satisfy admissibility and yield well defined conditional probabilities and at the same time to allow for "null"events. The need for a synthesis of expected utility with admissibility, and to provide a ranking of null events, has often been stressed in the decision theory literature. Furthermore, lexicographic beliefs are appropriate for characterizing refinements of Nash equilibrium. In this chapter we discuss: axioms on, and behavioral properties of, individual preferences which characterize lexicographic beliefs; probability-theoretic properties of the representations; and the relationships with other recent extensions of Bayesian SEU theory.

AB - Two properties of preferences and representations for choice under uncertainty which play an important role in decision theory are: (i) admissibility, the requirement that weakly dominated actions should not be chosen; and (ii) the existence of well defined conditional probabilities, that is, given any event a conditional probability which is concentrated on that event and which corresponds to the individual's preferences. The conventional Bayesian theory of choice under uncertainty, subjective expected utility (SEU) theory, fails to satisfy these properties - weakly dominated acts may be chosen, and the usual definition of conditional probabilities applies only to nonnull events. This chapter develops a non-Archimedean variant of SEU where decision makers have lexicographic beliefs; that is, there are (first-order) likely events as well as (higher-order) events which are infinitely less likely but not necessarily impossible. This generalization of preferences, from those having an SEU representation to those having a representation with lexicographic beliefs, can be made to satisfy admissibility and yield well defined conditional probabilities and at the same time to allow for "null"events. The need for a synthesis of expected utility with admissibility, and to provide a ranking of null events, has often been stressed in the decision theory literature. Furthermore, lexicographic beliefs are appropriate for characterizing refinements of Nash equilibrium. In this chapter we discuss: axioms on, and behavioral properties of, individual preferences which characterize lexicographic beliefs; probability-theoretic properties of the representations; and the relationships with other recent extensions of Bayesian SEU theory.

KW - admissibility

KW - conditional probabilities

KW - lexicographic probabilities

KW - non-Archimedean preferences

KW - subjective expected utility

KW - weak dominance

UR - http://www.scopus.com/inward/record.url?scp=85173056822&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85173056822&partnerID=8YFLogxK

U2 - 10.1142/9789814513449_0006

DO - 10.1142/9789814513449_0006

M3 - Chapter

AN - SCOPUS:85173056822

T3 - World Scientific Series in Economic Theory

SP - 137

EP - 160

BT - World Scientific Series in Economic Theory

A2 - Brandenburger, Adam

PB - World Scientific

ER -