A Theory of Quantifiable Beliefs

ANU Working Papers in Economics and Econometrics No. 338

40 Pages Posted: 10 Jan 2001

See all articles by Edi Karni

Edi Karni

Johns Hopkins University - Department of Economics

Simon Grant

Rice University - Department of Economics; Australian National University

Date Written: November 2000

Abstract

Building upon the works of Anscombe and Aumann (1963) and Karni and Schmeidler (1981), we develop a general axiomatic theory of quantifiable beliefs - a form of probabilistic sophistication that does not preclude state-dependent preferences and does not require the reduction of compound lotteries. The theory includes the state-dependent expected utility model of Karni and Schmeidler (1981) and the state-independent non-expected utility model of Machina and Schmeidler (1995) as special cases. The theory is flexible enough to admit recursivity in the decision-making process. One specific example of this recursive class is shown to be compatible with a quantifiable beliefs version of Schmeidler's (1989) Choquet expected utility maximizing model and thus capable of rationalizing Ellsberg-paradox type behavior.

Keywords: subjective probability, quantifiable beliefs, state-dependent preferences, probabilistic sophistication, non-expected utility

JEL Classification: D80, D81

Suggested Citation

Karni, Edi and Grant, Simon Harold, A Theory of Quantifiable Beliefs (November 2000). ANU Working Papers in Economics and Econometrics No. 338. Available at SSRN: https://ssrn.com/abstract=251799 or http://dx.doi.org/10.2139/ssrn.251799

Edi Karni (Contact Author)

Johns Hopkins University - Department of Economics ( email )

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Simon Harold Grant

Rice University - Department of Economics ( email )

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Australian National University ( email )

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