Axiomatization of a Preference for Most Probable Winner
IEW Working Paper No. 230
21 Pages Posted: 10 Feb 2005
Date Written: February 2005
Abstract
In binary choice between discrete outcome lotteries, an individual may prefer lottery L1 to lottery L2 when the probability that L1 delivers a better outcome than L2 is higher than the probability that L2 delivers a better outcome than L1. Such a preference can be rationalized by three standard axioms (solvability, convexity and symmetry) and one less standard axiom (a fanning-in). A preference for the most probable winner can be represented by a skew-symmetric bilinear utility function. Such a utility function has the structure of a regret theory when lottery outcomes are perceived as ordinal and the assumption of regret aversion is replaced with a preference for a win. The empirical evidence supporting the proposed system of axioms is discussed.
Keywords: expected utility theory, axiomatization, betweenness, fanning-in, skew-symmetric bilinear utility, regret theory
JEL Classification: C91, D81
Suggested Citation: Suggested Citation
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