SFB 303 Discussion Paper No. A - 256

Author: Hens, Thorsten
Title: A Characterization of Subjective Expected Utility in a Model with a Continuum of Consequences and a Finite Number of States
Abstract: This note provides a characterization of expected utility for the general equilibrium model with smooth preferences. The characterization follows Savage (1954) as closely as possible. The first two axioms we use are Savage´s 'Sure Thing Principle' and his 'State Independence' Axiom. But instead of Savage´s 'Ordering of Events' we apply a stronger axiom which turns out to be equivalent to subjective expected utility given the two first axioms. The content of this new axiom is that for each pair of states there must be a good for which the marginal rates of substitution between the states are constant along some certainty line. It is this axiom that makes it possible to separate subjective probabilities from basic tastes in such a way that the representing utility function becomes linear in the probabilities. Since the expected utility hypothesis has recently been criticized empirically for exactly this property our axiomatization provides a basis for this critique in the general equilibrium setting. The note closes with a comparison of our third axiom with Savage´s Ordering of Events.
Creation-Date: July 1989
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