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Stochastic and Intransitive Behavior in a State‐Preference Model of Asset Choice *
Author(s) -
Bernardo John J.,
Upton David E.
Publication year - 1992
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1992.tb00438.x
Subject(s) - satisficing , preference , mathematical economics , probabilistic logic , context (archaeology) , set (abstract data type) , function (biology) , computer science , asset (computer security) , expected utility hypothesis , interpretation (philosophy) , economics , microeconomics , artificial intelligence , paleontology , computer security , evolutionary biology , programming language , biology
Most models of investor behavior assume a time‐state independent utility function and result in a deterministic solution where a given set of inputs uniquely specifies the decision. In contrast, a state preference model using a time‐state dependent utility function is derived in this paper. The model allows the investment choice decision to be analyzed in a game theoretic context. The general solution is a mixed strategy which allows for a probabilistic interpretation of the decision. The approach presented in this paper can accommodate anomalies such as intransitivity of preference and satisficing as rational behavior. An example of a possible implementation is given along with interpretations of the outcomes.