Cautious Expected Utility and the Certainty Effect

48 Pages Posted: 18 Feb 2014

See all articles by Simone Cerreia-Vioglio

Simone Cerreia-Vioglio

Bocconi University - Department of Decision Sciences

David Dillenberger

University of Pennsylvania - Department of Economics

Pietro Ortoleva

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 17, 2014

Abstract

Many violations of the Independence axiom of Expected Utility can be traced to subjects' attraction to risk-free prospects. The key axiom in this paper, Negative Certainty Independence (Dillenberger, 2010), formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy Negative Certainty Independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how to evaluate a given lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a well-defined sense. We show that our representation can also be derived from a 'cautious' completion of an incomplete preference relation.

Keywords: Preferences under risk, Allais paradox, Negative Certainty Independence, Incomplete preferences, Cautious Completion, Multi-Utility representation

JEL Classification: D80, D81

Suggested Citation

Cerreia-Vioglio, Simone and Dillenberger, David and Ortoleva, Pietro, Cautious Expected Utility and the Certainty Effect (February 17, 2014). PIER Working Paper No. 14-005; Columbia Business School Research Paper No. 14-20. Available at SSRN: https://ssrn.com/abstract=2397353 or http://dx.doi.org/10.2139/ssrn.2397353

Simone Cerreia-Vioglio

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

David Dillenberger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1503 (Phone)

Pietro Ortoleva

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
68
Abstract Views
815
rank
245,177
PlumX Metrics