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Preference Foundations for Nonexpected Utility: A Generalized and Simplified Technique

Department of Quantitative Economics, Maastricht University, P.O. Box 616, Maastricht 6200 MD, The Netherlands
Department of Quantitative Economics, Maastricht University, P.O. Box 616, Maastricht 6200 MD, The Netherlands
v.koebberling{at}ke.unimaas.nl
P.P.Wakker{at}UvA.nl

This paper examines a tradeoff-consistency technique for testing and axiomatically founding decision models. The technique modifies earlier tradeoff-consistency techniques by only considering indifferences, not strict preferences. The resulting foundations are both more general and more accessible than earlier results, and they are so regarding both the technical and the intuitive axioms. Axiomatizations based on other, bisymmetry-like, conditions also follow as corollaries from the results of this paper. The tradeoff technique is applied to three popular theories of individual decision under uncertainty and risk, i.e., expected utility, Choquet expected utility, and prospect theory. The conditions used are better suited for empirical measurements of utility than earlier tradeoff conditions and, accordingly, are easier to test.

Key Words: Comonotonic; prospect theory; tradeoff consistency; Choquet integral; rank-dependent; bisymmetry
History: Received: January 4, 2002; revision received: January 1, 2003;

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