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Measuring utility without mixing apples and oranges and eliciting beliefs about stock prices

O'Callaghan, Patrick (2016): Measuring utility without mixing apples and oranges and eliciting beliefs about stock prices.

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Abstract

In day-to-day life we encounter decisions amongst prospects that do not have a convex structure. To address this concern, Herstein and Milnor introduce mixture sets and provide necessary and sufficient conditions for a cardinal and linear utility representation. We derive the same utility representation for partial mixture sets: where the mixture operation is only partially defined. The resulting model has an interesting application to finance. In particular, we use paths instead of events to elicit utility and beliefs about stock prices. This feature is promising for settings where the dimension of the state space is large.

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