A Non-Bayesian Theory of State-Dependent Utility
41 Pages Posted: 22 May 2018 Last revised: 10 Mar 2019
Date Written: November 30, 2018
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: Suggested Citation