Some Normative Properties of RDEU

Abstract

The motivation for the development of RDEU theory and other generalizations of EU theory was twofold. First, there was the desire, in view of the well known violations of the predictions of EU theory, to produce a more adequate descriptive model of choice under uncertainty. Second, there was a widespread view that the independence axiom lacked the normative appeal of the dominance and transitivity axioms (the continuity and completeness axioms are primarily technical). Historically the second concern came first. The Allais ‘paradox’ was developed to illustrate problems with the von Neumann-Morgenstern independence axiom. Savage’s sure thing principle was a reformulation of the independence axiom designed to enhance its normative appeal.