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Representing preferences with a unique subjective state space. (English) Zbl 1026.91032
Econometrica 69, No. 4, 891-934 (2001); corrigendum ibid. 75, No. 2, 591-600 (2007).
Summary: We extend D. M. Kreps’ analysis of preference for flexibility [Econometrica 47, 565–577 (1979; Zbl 0423.90005)], reinterpreted in [D. M. Kreps, “Static choice and unforeseen contingencies”, in: Economic analysis of markets and games: Essays in honor of Frank Hahn, ed. by P. Dargupta, D. Gale, O. Hart, and E. Maskin, Cambridge MA: MIT Press. 259–281 (1992)] as a model of unforeseen contingencies. We enrich the choice set, consequently obtaining uniqueness results that were not possible in Kreps’ model. We consider several representations and allow the agent to prefer commitment in some contingencies. In the representations, the agent acts as if she had coherent beliefs about a set of possible future (ex post) preferences, each of which is an expected-utility preference. We show that this set of ex post preferences, called the subjective state space, is essentially unique given the restriction that all ex post preferences are expected-utility preferences and is minimal even without this restriction. Because the subjective state space is identified, the way ex post utilities are aggregated into an ex ante ranking is also essentially unique. Hence when a representation that is additive across states exists, the additivity is meaningful in the sense that all representations are intrinsically additive. Uniqueness enables us to show that the size of the subjective state space provides a measure of the agent’s uncertainty about future contingencies and that the way the states are aggregated indicates whether these contingencies lead to a desire for flexibility or commitment.

MSC:
91B08 Individual preferences
91B02 Fundamental topics (basic mathematics, methodology; applicable to economics in general)
91B16 Utility theory
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