Rational Preferences With A Discontinuity Structure

Abstract

We present an Axiom System and a Representation Theorem for a class of preferences on lotteries which we call Rational Preference Orderings with a Discontinuity Structure, and which implies Expected Utility Theory as a continuous special case. Rational Preference Orderings with a Discontinuity Structure are based on so-called Security Level Eects, independently introduced by I.Gilboa and Y.-J.Jaray, and Potential Level Effects, introduced by M.Cohen, which formalize particular psychological attitudes towards the evaluation of uncertain outcomes. In this paper we present two main extensions of these models: 1. We introduce the concept of a Discontinuity Structures which determines unambiguously the occurence of Security Level Effects and of a Potential Level Effects for a given preference ordering. As a consequence our Representation Theorem provides an exact specificaton of the discontinuities in the Utility function. 2. We introduce

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