ISSN:
1573-7187
Keywords:
preferences
;
expected utility
;
subjective probability
;
Bayesian risk
Source:
Springer Online Journal Archives 1860-2000
Topics:
Sociology
,
Economics
Notes:
Abstract A rational statistical decision maker whose preferences satisfy Savage's axioms will minimize a Bayesian risk function: the expectation with respect to a revealed (or subjective) probability distribution of a loss (or negative utility) function over the consequences of the statistical decision problem. However, the nice expected utility form of the Bayesian risk criterion is nothing but a representation of special preferences. The subjective probability is defined together with the utility (or loss) function and it is not possible, in general, to use a given loss function - say a quadratic loss - and to elicit independently a subjective distribution. I construct the Bayesian risk criterion with a set of five axioms, each with a simple mathematical implication. This construction clearly shows that the subjective probability that is revealed by a decider's preferences is nothing but a (Radon) measure equivalent to a linear functional (the criterion). The functions on which the criterion operates are expected utilities in the von Neumann-Morgenstern sense. It then becomes clear that the subjective distribution cannot be eliciteda priori, independently of the utility function on consequences. However, if one considers a statistical decision problem by itself, losses, defined by a given loss function, become the consequences of the decisions. It can be imagined that experienced statisticians are used to dealing with different losses and are able to compare them (i.e. have ‘preferences’, or ‘fears’ over a set of possible losses). Using suitable axioms over these preferences, one can represent them by a (linear) criterion: this criterion is the expectation of losses with respect to a (revealed) distribution. It must be noted that such a distribution is a measure and need not be a probability distribution.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF00132992
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