Decision making under uncertainty comprising complete ignorance and probability

This paper investigates a model of decision making under uncertainty comprising opposite epistemic states of complete ignorance and probability. In the first part, a new utility theory under complete ignorance is developed that combines Hurwicz-Arrow's theory of decision under ignorance with Anscombe-Aumann's idea of reversibility and monotonicity used to characterize subjective probability. The main result is a representation theorem for preference under ignorance by a particular one-parameter function - the r-anchor utility function. In the second part, we study decision making under uncertainty comprising an ignorant variable and a probabilistic variable. We show that even if the variables are independent, they are not reversible in Anscombe-Aumann's sense. This insight leads to the development of a new proposal for decision under uncertainty represented by a preference relation that satisfies the weak order and monotonicity assumptions but rejects the reversibility assumption. A distinctive feature of the new proposal is that the certainty equivalent of a mapping from the state space of uncertain variables to the prize space depends on the order in which the variables are revealed. Explicit modeling of the order of variables explains some of the puzzles in multiple-prior model and the models for decision making with Dempster-Shafer belief function. (C) 2015 Elsevier Inc. All rights reserved.