Vector expected utility and attitudes toward variation

Marciano Siniscalchi*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

72 Scopus citations

Abstract

This paper proposes a model of decision under ambiguity deemed vector expected utility, or VEU. In this model, an uncertain prospect, or Savage act, is assessed according to (a) a baseline expected-utility evaluation, and (b) an adjustment that 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, or adjustment 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.

Original languageEnglish (US)
Pages (from-to)801-855
Number of pages55
JournalEconometrica
Volume77
Issue number3
DOIs
StatePublished - May 2009

Keywords

  • Ambiguity
  • Attitudes toward variability
  • Reference prior

ASJC Scopus subject areas

  • Economics and Econometrics

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