Worst-case expected utility

The paper presents a model in which a decision maker, having a preference relation over purely subjective acts, slightly deviates from the Subjective Expected Utility decision rule, exhibiting an uncertainty averse behavior á-la Schmeidler (1989). The resulting representation is as if the decision maker adds to the formulation of the problem one new state, representing the occurrence of some unforeseen event. Each Savage act is extended to the new, endogenous state by assigning this state with the worst consequence the act obtains on all other, primitive states. On the extended decision problem a Subjective Expected Utility rule is applied. The representation thus expresses the common practice of a ‘worst-case scenario’ assumption as means to cope with unforeseen contingencies. The model is a special case of the neo-additive capacities model of Chateauneuf, Eichberger and Grant.