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Revealed Likelihood and Knightian Uncertainty

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  • Sarin, Rakesh
  • Wakker, Peter P

Abstract

Nonadditive expected utility models were developed for explaining preferences in settings where probabilities cannot be assigned to events. In the absence of probabilities, difficulties arise in the interpretation of likelihoods of events. In this paper we introduce a notion of revealed likelihood that is defined entirely in terms of preferences and that does not require the existence of (subjective) probabilities. Our proposal is that decision weights rather than capacities are more suitable measures of revealed likelihood in rank-dependent expected utility models and prospect theory. Applications of our proposal to the updating of beliefs and to the description of attitudes towards ambiguity are presented. Copyright 1998 by Kluwer Academic Publishers

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  • Sarin, Rakesh & Wakker, Peter P, 1998. "Revealed Likelihood and Knightian Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 16(3), pages 223-250, July-Aug..
    • Handle: RePEc:kap:jrisku:v:16:y:1998:i:3:p:223-50
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    1. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    2. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    3. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-1280, November.
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