Coherent decision analysis with inseparable probabilities and utilities

This article explores the extent to which a decision maker's probabilities can be measured separately from his/her utilities by observing his/her acceptance of small monetary gambles. Only a partial separation is achieved: the acceptable gambles are partitioned into a set of "belief gambles," which reveals probabilities distorted by marginal utilities for money, and a set of "preference gambles," which reveals utilities reciprocally distorted by marginal utilities for money. However, the information in these gambles still enables us to solve the decision maker's problem: his/her utility-maximizing decision is the one that avoids arbitrage (i.e., incoherence or Dutch books). © 1995 Kluwer Academic Publishers.

Duke Scholars

Author Robert F. Nau Fuqua School of Business