Probabilistic sophistication and variational preferences

This paper shows that in the class of variational preferences the notion of probabilistic sophistication is equivalent to expected utility as long as there exists at least one event such that the independence axiom holds for bets on that event. This extends a result of Marinacci (2002) and provides a novel interpretation of his result. ∗This note is a revised and extended version of Chapter 9 of my dissertation at Northwestern University; some of the results were also reported in my job market paper. Part of this research was done while I was visiting the Economic Theory Center at Princeton University, to which I’m very grateful for its support and hospitality. I would like to thank Eddie Dekel, Peter Klibanoff, Massimo Marinacci, Jan Werner, as well as an associate editor and a referee for their very helpful comments and suggestions. All errors are my own. This version: October 26, 2010. †Department of Economics, Harvard University. E-mail: tomasz [email protected]