Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/31216 
Year of Publication: 
2008
Series/Report no.: 
Discussion Paper No. 1455
Publisher: 
Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science, Evanston, IL
Abstract: 
This paper proposes a model of decision under ambiguity deemed vector expected utility, or VEU. In this model, an uncertain prospect, or Savage act, is assessed according to (a) a baseline expected-utility evaluation, and (b) an adjustment that reflects the individual's perception of ambiguity and her attitudes toward it. The adjustment is itself a function of the act's exposure to distinct sources of ambiguity, as well as its variability. The key elements of the VEU model are a baseline probability and a collection of random variables, or adjustment factors, which represent acts exposed to distinct ambiguity sources and also reflect complementarities among ambiguous events. The adjustment to the baseline expectedutility evaluation of an act is a function of the covariance of its utility profile with each adjustment factor, which reflects exposure to the corresponding ambiguity source. A behavioral characterization of the VEU model is provided. Furthermore, an updating rule for VEU preferences is proposed and characterized. The suggested updating rule facilitates the analysis of sophisticated dynamic choice with VEU preferences.
Subjects: 
Ambiguity
attitudes toward variability
reference prior
Document Type: 
Working Paper

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