Abstract
Savage's expected utility theory has been criticized for various reasons. Two of these are: (1) Subjective probabilities may be more or less ambiguous; this may affect the preference order. Savage's theory rules out any such effect. (2) Savage's theory rules out any influence of certain parameters of a probability distribution on the preference order. Such parameters are fractiles or pairs of fractiles, e.g., which have gained widespread attention as risk measures.
This paper generalizes expected utility theory to include effects of ambiguity and those parameters on the preference order. Basic to this generalization is the classic paper by Herstein/Milnor.
Similar content being viewed by others
References
Arzac, E. R., Bawa, V. S. (1977) Portfolio choice and equilibrium in capital markets with safety-first investors. Journal of Financial Economics 4 277–288.
Balch, M., Fishburn, P.C. (1974) Subjective expected utility for conditional primitives. In: Essays on Economic Behavior Under Uncertainty, by M. Balch, D. McFadden, S. Wu (eds). North-Holland, Amsterdam, 57–69.
Ellsberg, D. (1961) Risk, Ambiguity, and the Savage axioms. Quarterly Journal of Economics 75 643–669.
Fellner, W. (1961) Distortion of subjective probabilities as a reaction to uncertainty. Quarterly Journal of Economics 75 670–689.
Fellner, W. (1965) Probability and profit. R. Irwin, Homewood.
Fishburn, P. (1967) Preference-based definitions of subjective probability. Annals of Mathematical Statistics 38 1605–1617.
Fishburn, P. (1975) A Theory of subjective expected utility with vague preferences. Theory and Decision 6 287–310.
Fishburn, P. (1970) Utility theory for decision making. Wiley, New York.
Herstein, I. N., Milnor, J. (1953) An axiomatic approach to measurable utility. Econometrica 21 291–297.
Hodges, J. L., Lehmann, E. L. (1952) The use of previous experience in reaching statistical decisions. Annals of Mathematical Statistics 23 396–407.
Krelle, W. (1968) Präferenz-und Entscheidungstheorie. Mohr, Tübingen.
Luce, R., Krantz, D. (1971) Conditional expected utility. Econometrica 39 253–271.
Marschak, J. et. al. (1975) Personal probabilities of probabilities. Theory and Decision 6 121–153.
Pratt, J.W. (1964) Risk-aversion in the small and in the large. Econometrica 32 122–136.
Raiffa, H. (1961) Risk, ambiguity and the Savage-axioms: Comment. Quarterly Journal of Economics 75 690–694.
Savage, L. J. (1954) The foundations of statistics. Wiley, New York.
Schneeweiss, H. (1967) Entscheidungskriterien bei Risiko. Springer, New York.
Sherman, R. (1974) The psychological difference between ambiguity and risk. Quarterly Journal of Economics 88 166–169.
Smith, V. L. (1969) Measuring nonmonetary utilities in uncertain choices: The Ellsberg urn. Quarterly Journal of Economics 83 324–329.
von Neumann, J., Morgenstern, O. (1947) Theory of games and economic behavior. 2nd. ed., Princeton University Press.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Franke, G. Expected utility with ambiguous probabilities and ‘irrational’ parameters. Theor Decis 9, 267–283 (1978). https://doi.org/10.1007/BF00133455
Issue Date:
DOI: https://doi.org/10.1007/BF00133455