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Certainty Independence and the Separation of Utility and Beliefs

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  • Paolo Ghirardato
  • Fabio Maccheroni
  • Massimo Marinacci

Abstract

Economists often operate under an implicit assumption that the tastes of a decision maker are constant, while his beliefs change with the availability of new information. It is therefore customary to seek representations of preferences which cleanly separate the taste component, called ‘utility,’ from the beliefs component. We show that a complete separation of utility from the other components of the representation is possible only if the decision maker’s preferences satisfy a mild but not completely innocuous condition, called ‘certainty independence.’ We prove that the preferences that obtain such separation are a subset of the biseparable preferences.nonatomic probability measures, we extend some of these results to the case of individuals with decreasing marginal evaluations.

Suggested Citation

  • Paolo Ghirardato & Fabio Maccheroni & Massimo Marinacci, 2002. "Certainty Independence and the Separation of Utility and Beliefs," ICER Working Papers - Applied Mathematics Series 40-2002, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpmath:40-2002
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    References listed on IDEAS

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    1. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
    2. Paolo Ghirardato & Massimo Marinacci, 2001. "Risk, Ambiguity, and the Separation of Utility and Beliefs," Mathematics of Operations Research, INFORMS, vol. 26(4), pages 864-890, November.
    3. F J Anscombe & R J Aumann, 2000. "A Definition of Subjective Probability," Levine's Working Paper Archive 7591, David K. Levine.
    4. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    5. Paolo Ghirardato & Fabio Maccheroni & Massimo Marinacci & Marciano Siniscalchi, 2003. "A Subjective Spin on Roulette Wheels," Econometrica, Econometric Society, vol. 71(6), pages 1897-1908, November.
    6. Larry G. Epstein, 1999. "A Definition of Uncertainty Aversion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 579-608.
    7. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
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