Expected balanced uncertain utility

Abstract

We introduce and analyze expected balanced uncertain utility (EBUU) theory. A prior and a balanced outcome‐set utility characterize an EBUU decision maker. Conditional on a reference or “balancing value,” the latter assigns a utility to each outcome‐set. The decision maker associates with each act, its envelope, the minimal measurable mapping from states to outcome‐sets that contains the act. She then (implicitly) ranks an act according to the balancing value at which the expected balanced utility of its associated envelope is zero. As a consequence, her risk preferences need only exhibit betweenness allowing for behavior that can accommodate Allais‐type paradoxes.

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