||"Preferences for Randomization and Anticipated Utility" |
|| PDF file
This paper presents a theory of preferences for randomization by using the framework of preferences over menus. In the framework, the decision maker chooses a menu at the first stage; at the second stage, she chooses a probability distribution on the chosen menu at the first stage. The resulting behavior is captured by expected utility theory, but at the choice of the first stage, the decision maker may have non-linear preferences due to cognitive effects. This paper introduces new axioms on preferences for randomization by relaxing the axioms of Strategic Rationality and Independence. This paper imposes on the axioms of Randomization and Strong Singleton Independence. The new axioms, along with basic axioms, characterize a random anticipated utility representation, in which the subjective belief for the effect of randomization is uniquely identified. Randomization attitudes, captured by probability-weighting functions, and risk attitude are separately identified. By relaxing the two axioms, this paper studies more general cases such as preferences for flexibility, subjective learning, and costly randomization. Moreover, the resulting behaviors are characterized by stochastic choice functions.