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A Theory of Coarse Utility
Liu, Liping Shenoy, Prakash P.
Liu, Liping
Shenoy, Prakash P.
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Abstract
This article presents a descriptive theory for complex choice problems. In line with the bounded rationality
assumption, we hypothesize that decision makers modify a complex choice into some coarse approximations,
each of which is a binary lottery. We define the value of a best coarse approximation to be the utility of the
choice. Using this paradigm, we axiomatize and justify a new utility function called the coarse utility function.
We show that the coarse utility function approximates the rank- and sign-dependent utility function. It satisfies
dominance but admits violations of independence. It reduces judgmental load and allows flexible judgmental
information. It accommodates phenomena associated with probability distortions and provides a better resolution
to the St. Petersburg paradox than the expected and rank-dependent theories.
Description
This is the author's final draft. The publisher's official version is available electronically from: <http://link.springer.com/content/pdf/10.1007%2Fs10479-012-1171-9>.
Date
1995
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Kluwer Academic Publishers
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Keywords
Decision analysis, Utility theory, Coarse utility function, Rank-dependent utilities
Citation
Shenoy, Prakash. (1995) A Theory of Coarse Utility. Journal of Risk and Uncertainty, 11 (1), 17--49.