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Utility theory with probability-dependent outcome valuation

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  • Karni, Edi

Abstract

This paper provides an axiomatic characterization of a class of nonexpected utility models of decision making under risk. It formalizes the notion that the valuation of outcomes may depend on the probability measure in whose support the outcomes are contained and defines a transformation of the space of risky prospects taking account of these probability-dependent valuations. The von Neumann-Morgenstern axioms are imposed on the preference relation among the transformed risky prospects to obtain a representation that is nonlinear in the probabilities. Some implications of the resulting models are pointed out using local expected utility analysis.

Suggested Citation

  • Karni, Edi, 1992. "Utility theory with probability-dependent outcome valuation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 111-124.
    • Handle: RePEc:eee:jetheo:v:57:y:1992:i:1:p:111-124
    DOI: 10.1016/S0022-0531(05)80043-2
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    References listed on IDEAS

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    1. John D. Hey, 1984. "The Economics of Optimism and Pessimism," Kyklos, Wiley Blackwell, vol. 37(2), pages 181-205, May.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-1092, July.
    4. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    5. Fishburn, Peter C., 1983. "Transitive measurable utility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 293-317, December.
    6. Dekel, Eddie, 1986. "An axiomatic characterization of preferences under uncertainty: Weakening the independence axiom," Journal of Economic Theory, Elsevier, vol. 40(2), pages 304-318, December.
    7. Karni, Edi & Schmeidler, David, 1991. "Utility theory with uncertainty," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 33, pages 1763-1831, Elsevier.
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    Cited by:

    1. Battigalli, Pierpaolo & Dufwenberg, Martin, 2009. "Dynamic psychological games," Journal of Economic Theory, Elsevier, vol. 144(1), pages 1-35, January.
    2. Geiger, Gebhard, 2002. "On the statistical foundations of non-linear utility theory: The case of status quo-dependent preferences," European Journal of Operational Research, Elsevier, vol. 136(2), pages 449-465, January.

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