Subjective Probabilities on a State Space

This paper extends the work of Karni (2009) in two distinct directions. First, it generalizes the model allowing for action-bet interaction and, consequently, the possibility that the decision-maker’s risk attitudes may be affected by his choice of action. Second, it extends the analytical framework to include a state space and advances a choice-based definition of subjective probabilities that represent the beliefs of Bayesian decision makers regarding the likelihoods of events, thus resolving a fundamental difficulty with the definition of subjective probabilities. ∗I grateful to Jacques Drèze and Brian Hill for their comments on an earlier draft of this paper and to Efe Ok and Marco Scarcini for enlightening conversations and useful suggestions.