MICRO/THEORY: Correlation Preference; Professor Chew Soo Hong (National University of Singapore)

Abstract

We propose a correlation utility (CU) representation of correlation preference without requiring transitivity nor completeness. Under a correlation independence axiom, CU specializes to correlation expected utility (CEU) which is not compatible with the extended Allais paradox. This motivates our correlation betweenness and correlation projective independence axioms, which characterize correlation weighted utility (CWU). In the absence of correlation sensitivity, CEU reduces to EU while CWU reduces to skew-symmetric bilinear utility which reduces further to weighted utility under transitivity. Finally, we characterize correlation probabilistic sophistication preference, subsuming two major directions of generalization of SEU: maintaining Savage's Postulate 2 without transitivity, and vice versa.