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Measuring utility without mixing apples and oranges and eliciting beliefs about stock prices

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  • O'Callaghan, Patrick

Abstract

In day-to-day life we encounter decisions amongst prospects that do not have a convex structure. To address this concern, Herstein and Milnor introduce mixture sets and provide necessary and sufficient conditions for a cardinal and linear utility representation. We derive the same utility representation for partial mixture sets: where the mixture operation is only partially defined. The resulting model has an interesting application to finance. In particular, we use paths instead of events to elicit utility and beliefs about stock prices. This feature is promising for settings where the dimension of the state space is large.

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  • O'Callaghan, Patrick, 2016. "Measuring utility without mixing apples and oranges and eliciting beliefs about stock prices," MPRA Paper 69363, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:69363
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    References listed on IDEAS

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    More about this item

    Keywords

    Decision theory; Brownian bridge; Mixture set;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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