What Are Asset Demand Tests of Expected Utility Really Testing?*

Abstract

Assuming the classic contingent claim setting, a number of financial asset demand tests of Expected Utility have been developed and implemented in experimental settings. However the domain of preferences of these asset demand tests differ from the mixture space of distributions assumed in the traditional binary lottery laboratory tests of von Neumann-Morgenstern Expected Utility preferences. We derive new sets axioms that are necessary and sufficient for preferences over contingent claims to be representable by an Expected Utility function. We also indicate the additional axioms required to extend the representation to the more general case of preferences over risky prospects.

Source and rank-dependent utility

“…Original tradeoff consistency was also used to obtain other non-EU models such as regret theory (Diecidue and Somasundaram 2017) or purely subjective Maxmin EU (Alon and Schmeidler 2014). Other versions of tradeoff consistency have been applied to case-based decision making (Gilboa et al 2002), extreme outcome separability (Alon 2014), probabilistic settings (Abdellaoui 2002;Werner and Zank 2019), probability dependent EU (Kübler et al 2017), and to the general class of biseparable preferences (Ghirardato and Marinacci 2001; see Köbberling and Wakker 2003;or Chateauneuf et al 2021). For SRU we provide a source-dependent extension of rank-dependent tradeoff consistency.…”