Subjective Expected Utility Theory with 'Small Worlds'

27 Pages Posted: 18 Dec 2009

See all articles by Jacob Gyntelberg

Jacob Gyntelberg

Nordea Group; University of Copenhagen - Department of Economics

Frank Hansen

University of Copenhagen

Date Written: November 30, 2009

Abstract

We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models.

Keywords: subjective expected utility, decision making under uncertainty, uncertainty aversion, Ellsberg paradox

JEL Classification: D8, G12

Suggested Citation

Gyntelberg, Jacob and Hansen, Frank, Subjective Expected Utility Theory with 'Small Worlds' (November 30, 2009). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 09-26. Available at SSRN: https://ssrn.com/abstract=1523699 or http://dx.doi.org/10.2139/ssrn.1523699

Jacob Gyntelberg (Contact Author)

Nordea Group ( email )

Grønjordsvej 10
Copenhagen, DK - 2300
Denmark

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

Frank Hansen

University of Copenhagen ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

HOME PAGE: http://econ.ku.dk/okofh

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