Abstract
The simplest response to the problems associated with the EU independence axiom is to dispense with this axiom altogether. This approach is adopted by Machina (1982).27 Machina’s central theoretical tool is the notion of a local utility function. The idea is that people will act as expected utility maximizers in a neighborhood of any distribution F, but that they will maximize the expectation of a different utility function around another distribution F*. In particular, changes in initial wealth levels will lead, not only to decreasing absolute risk aversion effects of the kinds explored by Arrow and Pratt, but to shifts in the utility function itself.
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© 1993 Springer Science+Business Media Dordrecht
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Quiggin, J. (1993). Generalized Smooth Utility and RDEU. In: Generalized Expected Utility Theory. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-2182-8_12
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DOI: https://doi.org/10.1007/978-94-011-2182-8_12
Publisher Name: Springer, Dordrecht
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