Subjective Probability and Expected Utility without Additivity

TLDR

An act maps states of nature to deterministic or random outcomes, and comonotonic acts are defined by the absence of conflicting orderings across states, establishing the context for the new axiom. The paper introduces an axiom of comonotonic independence to extend expected utility theory. By weakening the von Neumann–Morgenstern independence axiom, the authors show that a nonadditive probability and a VNM utility arise from any continuous, monotonic weak order satisfying comonotonic independence, and expected utility can be computed via the Choquet.

Abstract

An act maps states of nature to outcomes: deterministic outcomes, as well as random outcomes, are included. Two acts f and g are comonotonic, by definition, if it never happens that f(s) > f(t) and g(t) > g(s) for some states of nature s and t. An axiom of comonotonic independence is introduced here. It weakens the von Neumann-Morgenstern axiom of independence as follows: If f > g and if f, g and h are comonotonic then $f + (1 - $)h > $g + (1 - $)h. If a nondegenerate, continuous, and monotonic (state independent) weak order over acts satisfies comonotonic independence, then it induces a unique non-(necessarily-) additive probability and a von Neumann-Morgenstern utility. Furthermore, one can compute the expected utility of an act with respect to the nonadditive probability, using the Choquet integral. This extension of the expected utility theory covers situations, such as the Ellsberg paradox, which are inconsistent with additive expected utility. The concept of uncertainty aversion and interpretation of comonotonic independence in the context of social welfare functions are included. Copyright 1989 by The Econometric Society. (This abstract was borrowed from another version of this item.)