SFB 303 Discussion Paper No. B - 449

Author: Pope, Robin
Title: Reconciliation with the Utility of Chance by Elaborated Outcomes Destroys the Axiomatic Basis of Expected Utility Theory
Abstract: Expected utility theory does not directly deal with the utility of chance. It has been suggested in the literature (Samuelson 1952, Markowitz 1959) that this can be remedied by an approach which explicitly models the emotional consequences which give rise to the utility of chance. We refer to this as the elaborated outcomes approach. It is argued that the elaborated outcomes approach destroys the possibility of deriving a representation theorem based on the usual axioms of expected utility theory. This is shown with the help of an example due to Markowitz. It turns out that the space of conceivable lotteries over elaborated outcomes is too narrow to permit the application of the axioms. Moreover it is shown that a representation theorem does not hold for the example.
Keywords: Utility of chance, elaborated outcomes, axiomatised expected utility theory, representation theorem
JEL-Classification-Number: D81
Creation-Date: February 1999
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