| Abstract: | A new theory of preferences under risk is presented that does not use the transitivity and independence axioms of the von Neumann-Morgenstern linear utility theory. Utilities in the new theory are unique up to a similarity transformation (ratio scale measurement). They key to this generalization of the traditional linear theory lies in its representation of binary preferences by a bivariate rather than univariate real valued function. Linear theory obtains a linear function u on a set P of probability measures for which u(p) > u(q) if and only if p is preferred to q. The new theory obtains a skew-symmetric bilinear function φ on P × P for which φ(p, q) > 0 if and only if p is preferred to q. Continuity, dominance, and symmetry axioms are shown to be necessary and sufficient for the new representation. |
