A Non-Bayesian Theory of State-Dependent Utility

41 Pages Posted: 22 May 2018 Last revised: 10 Mar 2019

See all articles by Brian Hill

Brian Hill

HEC Paris - Economics & Decision Sciences; CNRS

Date Written: November 30, 2018

Abstract

Many decision situations involve two or more of the following divergences from subjective expected utility: imprecision of beliefs (or ambiguity), imprecision of tastes (or multi-utility), and state dependence of utility. Examples include multi-attribute decisions under uncertainty, such as some climate decisions, where trade-offs across attributes may be state dependent. This paper proposes and characterises a model of uncertainty averse preferences that can simultaneously incorporate all three phenomena. The representation supports a principled separation of (imprecise) beliefs and (potentially state-dependent, imprecise) tastes, and we pinpoint the axiom that ensures such a separation. Moreover, the representation supports comparative statics of both beliefs and tastes, and is modular: it easily delivers special cases involving various combinations of the phenomena, as well as state-dependent multi-utility generalisations of popular ambiguity models.

Keywords: state-dependent utility, uncertainty aversion, multiple priors, ambiguity, imprecise tastes, multi-utility

JEL Classification: D81

Suggested Citation

Hill, Brian, A Non-Bayesian Theory of State-Dependent Utility (November 30, 2018). HEC Paris Research Paper No. ECO/SCD-2018-1297. Available at SSRN: https://ssrn.com/abstract=3177028 or http://dx.doi.org/10.2139/ssrn.3177028

Brian Hill (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

CNRS ( email )

3, rue Michel-Ange
Paris, 75794
France

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