Iterated Choquet expectations: A possibility result

Dominiak, Adam

doi:10.1016/j.econlet.2013.04.008

Cited by 8 publications

(1 citation statement)

References 26 publications

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“…We show that, for given preferences, one can maintain the two properties by restricting the events that can be conditioned on. Dominiak (2013) has a related result about iterated Choquet expectations when the conditioning event is unambiguous. Segal (1990) investigates the relationship between reduction and independence axioms for preferences over two‐stage lotteries.…”

Section: Discussionmentioning

confidence: 99%

Iterated expectations under rank‐dependent expected utility and implications for common valuation methods

Stomper

Vierø

2022

Canadian J of Economics

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This paper investigates the applicability of common valuation techniques in finance when the decision‐maker's preferences can be described by the rank‐dependent expected utility model. Under expected utility theory, compound lotteries can be valued by “iterating” expectations: the expected utility of a compound lottery is the expected value of a simple lottery over prizes that are certainty equivalents to follow‐up lotteries. We derive necessary and sufficient conditions for a similar valuation technique in the framework of rank‐dependent expected utility when a consequentialist decision‐maker has to choose between prospects that belong to a comonotonic class. The conditions coincide with those for dynamically consistent behaviour of such a decision‐maker. The decision‐maker must update her preferences based on a benchmark prospect that can be interpreted as a formalization of “black‐and‐white thinking.”

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Section: Discussionmentioning

confidence: 99%