Savage in the Market
We develop a behavioral axiomatic characterization of subjective expected utility (SEU) under risk aversion. Given is an individual agent's behavior in the market: assume a finite collection of asset purchases with corresponding prices. We show that such behavior satisfies a "revealed preference axiom" if and only if there exists a SEU model (a subjective probability over states and a concave utility function over money) that accounts for the given asset purchases.
Additional Information© 2015 The Econometric Society. Manuscript received February, 2014; final revision received January, 2015. We thank Kim Border and Chris Chambers for inspiration, comments, and advice. Matt Jackson's suggestions led to some of the applications of our main result.We also thank seminar audiences in Bocconi University, Caltech, Collegio Carlo Alberto, Princeton University, RUD 2014 (Warwick), University of Queensland, University of Melbourne, Larry Epstein, Eddie Dekel, Mark Machina, Massimo Marinacci, Fabio Maccheroni, John Quah, Ludovic Renou, Kyoungwon Seo, and Peter Wakker for comments. We are particularly grateful to the editor and three anonymous referees for their suggestions. The discussion of state-dependent utility and probabilistic sophistication in Sections 4 and 5 follow closely the suggestions of one particular referee.
Published - Echenique_et_al-2015-Econometrica.pdf
Supplemental Material - ecta1526-sup-0001-Supplement.pdf