Expected Utility in 3D

Abstract

Consider a subjective expected utility preference relation. It is usually held that the representations which this relation admits differ only in one respect, namely, the possible scales for the measurement of utility. In this paper, I discuss the fact that there are, metaphorically speaking, two additional dimensions along which infinitely many more admissible representations can be found. The first additional dimension is that of state-dependence. The second—and, in this context, much lesser-known—additional dimension is that of act-dependence. The simplest implication of their usually neglected existence is that the standard axiomatizations of subjective expected utility fail to provide the measurement of subjective probability with satisfactory behavioral foundations.

Keywords: decision theory under uncertainty, subjective expected utility, beliefs, subjective probability, revealed preference, state-dependent utility, moral hazard, act-dependence

JEL Classification: D80, D81, B40, B41