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Regret theory, Allais' Paradox, and Savage's omelet

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  • Vardan G. Bardakhchyan
  • Armen E. Allahverdyan

Abstract

We study a sufficiently general regret criterion for choosing between two probabilistic lotteries. For independent lotteries, the criterion is consistent with stochastic dominance and can be made transitive by a unique choice of the regret function. Together with additional (and intuitively meaningful) super-additivity property, the regret criterion resolves the Allais' paradox including the cases were the paradox disappears, and the choices agree with the expected utility. This superadditivity property is also employed for establishing consistency between regret and stochastic dominance for dependent lotteries. Furthermore, we demonstrate how the regret criterion can be used in Savage's omelet, a classical decision problem in which the lottery outcomes are not fully resolved. The expected utility cannot be used in such situations, as it discards important aspects of lotteries.

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  • Vardan G. Bardakhchyan & Armen E. Allahverdyan, 2023. "Regret theory, Allais' Paradox, and Savage's omelet," Papers 2301.02447, arXiv.org.
    • Handle: RePEc:arx:papers:2301.02447
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