Subjective States; A more Robust Model

Following Kreps [12], Nehring [16, 17] and Dekel, Lipman and Rustichini [5], we study the demand for flexibility and what it reveals about subjective uncertainty. As in the cited papers, the latter is represented by a subjective state space consisting of possible future preferences over actions to be chosen ex post. One contribution is to provide axiomatic foundations for a range of alternative hypotheses about the nature of these ex post preferences. Secondly, we establish a sense in which the subjective state space is uniquely pinned down by the agent's ex ante ranking of (random) menus. For both purposes, we show that it is advantageous to assume that the agent ranks random menus, and to think of ex post upper contour sets rather than ex post preferences. Finally, we demonstrate the tractability of our representation by showing that it can model the two comparative notions "2 desires more flexibility than 1"and "2 is more averse to flexibility-risk than is 1."