Econometrica: Jul, 1983, Volume 51, Issue 4
On State Dependent Preferences and Subjective Probabilities
David Schmeidler, Edi Karni, Karl Vind
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.