Comonotonic Book-Making with Nonadditive Probabilities

Mathematical Social Sciences (2002) 43, 135-149

CentER Working Paper No. 76

22 Pages Posted: 28 Nov 2000

See all articles by Enrico Diecidue

Enrico Diecidue

INSEAD – Decision Sciences

Peter P. Wakker

University of Amsterdam - Amsterdam School of Economics (ASE)

Abstract

This paper shows how de Finetti's book-making principle, commonly used to justify additive subjective probabilities, can be modified to agree with some nonexpected utility models. More precisely, a new foundation of the rank-dependent models is presented that is based on a comonotonic extension of the book-making principle. The extension excludes book-making only if all gambles considered induce a same rank-ordering of the states of nature through favorableness of their associated outcomes, and allows for nonadditive probabilities. Typical features of rank-dependence, hedging, ambiguity aversion, and pessimism and optimism, can be accommodated.

Keywords: Book-Making, Comonotonic, Choquet expected utility, ambiguity aversion, ordered vector space

JEL Classification: D81, C60

Suggested Citation

Diecidue, Enrico and Wakker, Peter P., Comonotonic Book-Making with Nonadditive Probabilities. Mathematical Social Sciences (2002) 43, 135-149, CentER Working Paper No. 76, Available at SSRN: https://ssrn.com/abstract=244663 or http://dx.doi.org/10.2139/ssrn.244663

Enrico Diecidue (Contact Author)

INSEAD – Decision Sciences ( email )

France

Peter P. Wakker

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

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