Expected Uncertain Utility Theory

Authors

  • Faruk Gul,

    1. Dept. of Economics, Princeton University, Princeton, NJ 08544, U.S.A.; fgul@princeton.edu
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  • Wolfgang Pesendorfer

    1. Dept. of Economics, Princeton University, Princeton, NJ 08544, U.S.A.; pesendor@princeton.edu
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    • The paper was presented as the Fisher–Schultz Lecture at the 2009 Econometric Society European Meetings in Barcelona. This research was supported by Grants from the National Science Foundation. We are grateful to Adriano Basso, Jay Lu, Asen Kochov, Peter Wakker, and three anonymous referees for their comments and suggestions.


Abstract

We introduce and analyze expected uncertain utility (EUU) theory. A prior and an interval utility characterize an EUU decision maker. The decision maker transforms each uncertain prospect into an interval-valued prospect that assigns an interval of prizes to each state. She then ranks prospects according to their expected interval utilities. We define uncertainty aversion for EUU, use the EUU model to address the Ellsberg Paradox and other ambiguity evidence, and relate EUU theory to existing models.

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