TY - UNPB

T1 - Subjective Expected Utility Theory with "Small Worlds"

AU - Gyntelberg, Jacob

AU - Hansen, Frank

N1 - JEL classification: D8, G12

PY - 2009

Y1 - 2009

N2 - We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models.

AB - We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models.

KW - Faculty of Social Sciences

KW - decision making under uncertainty

KW - uncertainty aversion

KW - Ellsberg paradox

M3 - Working paper

BT - Subjective Expected Utility Theory with "Small Worlds"

PB - Department of Economics, University of Copenhagen

ER -