A Behavioral Definition of States of the World

Overview & Synopsis

This paper elaborates an axiomatic treatment of the Subjective Expected Utility (SEU) model that dispenses with the assumption of an exogenous state space. Within a state-free description of uncertainty and alternatives, axioms for preferences are formulated and shown to characterize the existence of a subjective state space, a subjective probability and a utility function. In the representation, the individual appears to behave as if he used the state space to describe uncertainty and maximized SEU to make decisions. Moreover, the state space, probability and utility are unique in some appropriate sense.