A Parsimonious Theory of Subjective Probability

38 Pages Posted: 18 Mar 2021 Last revised: 10 Oct 2022

See all articles by Soo Hong Chew

Soo Hong Chew

Southwestern University of Finance and Economics; National University of Singapore

Jacob S. Sagi

University of North Carolina Kenan-Flagler Business School

Wenqian Wang

Hong Kong University of Science and Technology (Guangzhou)

Date Written: February 6, 2021

Abstract

We axiomatize subjective probabilities on finite domains without requiring richness in the outcome space or restrictions on risk preference through event exchangeability, defined in Chew and Sagi (2006), which was implicit in the prior literature (Savage, 1954; Machina and Schmeidler, 1992; Grant, 1995). We characterize the unique subjective probability representing the underlying exchangeability relation. This subjective probability can serve as foundation to derive expected utility and rank-linear utility by imposing the sure-thing principle and its comonotonic variant. We next characterize more general probabilistically sophisticated behavior—two Savage acts inducing the same lottery are indifferent, and adapt the characterization to small domains to further delivers source preference.

Keywords: Subjective Probability, Finite State Spaces, Exchangeability, Probabilistic Sophistication, State Dependence, Source Preference

Suggested Citation

Chew, Soo Hong and Sagi, Jacob and Wang, Wenqian, A Parsimonious Theory of Subjective Probability (February 6, 2021). Available at SSRN: https://ssrn.com/abstract=3777432 or http://dx.doi.org/10.2139/ssrn.3777432

Soo Hong Chew

Southwestern University of Finance and Economics ( email )

Hong Yuan Building
Chengdu, Sichuan 631000
China

National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

Jacob Sagi

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

Wenqian Wang (Contact Author)

Hong Kong University of Science and Technology (Guangzhou) ( email )

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