Choice under uncertainty with the best and worst in mind: Neo-additive capacities

Abstract

We develop the simplest generalization of subjective expected utility that can accommodate both optimistic and pessimistic attitudes towards uncertainty—Choquet expected utility with non-extreme-outcome-additive (neo-additive) capacities.A neo-additive capacity can be expressed as the convex combination of a probability and a special capacity, we refer to as a Hurwicz capacity, that only distinguishes between whether an event is impossible, possible or certain. We show that neo-additive capacities can be readily applied in economic problems, and we provide an axiomatization in a framework of purely subjective uncertainty. Show more