What Are Asset Demand Tests of Expected Utility Really Testing?

Assuming the classic contingent claim setting, a number of …nancial asset demand tests of Expected Utility have been developed and implemented in experimental settings. However the domain of preferences of these asset demand tests di¤er from the mixture space of distributions assumed in the traditional binary lottery laboratory tests of von Neumann-Morgenstern Expected Utility preferences. We derive new sets of axioms for preferences over contingent claims to be representable by an Expected Utility function. We also indicate the additional axioms required to extend the representation to the more general case of preferences over risky prospects. KEYWORDS. Expected utility, contingent claim demand, additive separability, lottery preferences, contingent claim preferences JEL CLASSIFICATION. D01, D11, D80. Kubler: University of Zurich, Plattenstrasse 32 CH-8032 Zurich (e-mail: [email protected]); Selden: University of Pennsylvania, Columbia University, Uris Hall, 3022 Broadway, New York, NY 10027 (e-mail: [email protected]); Wei: School of Economics, Fudan University, 600 Guoquan Road, Shanghai 200433, P.R. China, Sol Snider Entrepreneurial Research Center, Wharton School, University of Pennsylvania (e-mail: [email protected]). We thank David Dillenberger and Peter Wakker as well as the participants of our session at the Royal Econometric Society Conference 2016 for their very helpful comments and suggestions. Kubler acknowledges …nancial support from the ERC. Selden and Wei thank the Sol Snider Entrepreneurial Research Center –Wharton for support.