Subjective ambiguity and preference for flexibility

Abstract

A preference over menus is monotonic when every menu is at least as good as any of its subsets. We show that every utility representation for a monotonic preference is equal to the minmax value of a decision maker whose payoff depends on the option chosen from the menu and on the realization of a subjective state. This representation suggests a decision maker who faces uncertainty about her own future tastes and who exhibits an extreme form of pessimism with respect to this uncertainty. In the case of finitely many alternatives, we provide a characterization of monotonic preferences which relaxes the submodularity axiom of Kreps (1979). We characterize the minimal state space needed for our representation, and we show that the second-period choice behavior of our decision maker differs from the one implied by the costly contemplation model of Ergin (2003).