Transforming Probabilities without Violating Stochastic Dominance
The idea of expected utility, to transform payments into their utilities before calculating expectation, traces back at least to Bernoulli (1738). It is a very natural idea to transform, analogously, probabilities. This paper gives heuristic visual arguments to show that the, at first sight, natural way to do this, at second thought seems questionable. At second thought a sound and natural way is the way indicated by Quiggin (1982) and Yaari (1987a).
|Keywords||Bernoulli, expected utility, stochastic dominance|
Wakker, P.P.. (1989). Transforming Probabilities without Violating Stochastic Dominance. Springer. Retrieved from http://hdl.handle.net/1765/23231