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On State Dependent Preferences and Subjective Probabilities
Edi Karni
David Schmeidler
Karl Vind
Abstract
This paper presents an expected utility theory for state-dependent preferences. It proposes axioms that permit the joint derivation of subjective probabilities and utilities when the decision maker's preferences are not independent of the prevailing state of nature. In addition to the usual von Neumann-Morgenstern axioms, these axioms also include the requirement that the decision-maker's actual preferences are consistent with his preferences contingent on an hypothetical probability distribution over the states of nature. Two versions of the consistency axiom are introduced and their significance in the context of Bayesian decision theory is discussed.
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