Relative concave utility for risk and ambiguity (Q423712)

This paper presents a discrete version of marginal rates of substitution for analyzing utility under risk and ambiguity. The proposed version is based on preference midpoints and the standard sequence technique introduced by \textit{D. H. Krantz, R. D. Luce, P. Suppes} and \textit{A. Tversky} [Foundations of measurement. Vol. I: Additive and polynomial representations. Reprint of the 1971 original. Mineola, NY: Dover Publications (2007; Zbl 1118.91359)]. The authors show a general technique for comparing the concavity of different utility functions when probabilities need not be known. It generalizes: (a) Yaari's comparisons of risk aversion by not requiring identical beliefs; (b) Kreps and Porteus' information-timing preference by not requiring known probabilities; (c) Klibanoff, Marinacci, and Mukerji's smooth ambiguity aversion by not using subjective probabilities (which are not directly observable) and by not committing to (violations of) dynamic decision principles; (d) comparative smooth ambiguity aversion by not requiring identical second-order subjective probabilities. Presented technique completely isolates the empirical meaning of utility. It thus sheds new light on the descriptive appropriateness of utility to model risk and ambiguity attitudes.