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Decision Analysis Using Lottery-Dependent Utility

JOAO L. BECKER and RAKESH K. SARIN
Journal of Risk and Uncertainty
Vol. 2, No. 1 (1989), pp. 105-117
Published by: Springer
Stable URL: http://www.jstor.org/stable/41760552
Page Count: 13
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Decision Analysis Using Lottery-Dependent Utility
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Abstract

In this article we show how the lottery-dependent expected utility (LDEU) model can be used in decision analysis. The LDEU model is an extension of the classical expected utility (EU) model and yet permits preference patterns that are infeasible in the EU model. We propose a framework for constructing decision trees in a particular way that permits us to use the principle ofoptimality and thus the divide and conquer strategy for analyzing complex problems using the LDEU model. Our approach may be applicable to some other nonlinear utility models as well. The result is that, if desired, decision analysis can be conducted without assuming the restrictive substitution principle/independence axiom.

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