Axiomatization of stochastic models for choice under uncertainty
Journal article, Peer reviewed
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Original versionMathematical Social Sciences, volum 55, issue 3, May 2008, pages 341-370
This paper develops a theory of probabilistic models for risky choices. This theory can be viewed as an extension of the expected utility theory. One probabilistic version of the Archimedean Axiom and two versions of the Independence Axiom are proposed. In addition, additional axioms are proposed of which one is Luce’s Independence from Irrelevant Alternatives. It is demonstrated that different combinations of the axioms yield different characterizations of the probabilities for choosing the respective risky prospects. An interesting feature of the models developed is that they allow for violations of the expected utility theory known as the common consequence effect and the common ratio effect. Keywords: Random tastes, bounded rationality, independence from irrelevant alternatives, probabilistic choice among lotteries, Allais paradox
Accepted author manuscript /Post-print (after peer review) This is the author’s version of a work that was accepted for publication in Mathematical Social Sciences. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanism, may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Mathematical Social Sciences, vol 55 (3), May 2008, 341-370.