REVEALED PREFERENCE THEORY ON THE CHOICE OF LOTTERIES

The choice behavior of a decision-maker is said to be consistent with expected utility maximization if there exists a utility function defin ed on the set of prizes such that the decision-maker chooses lotteries with the highest expected utility. We present a revealed preference c haracterization of choice behavior that is consistent with expected ut ility maximization. A necessary and sufficient condition for expected utility maximization is that there does not exist a way to compound lo tteries such that the probability distribution over the final prizes g enerated by the chosen lotteries of each observation is equal to that generated by the rejected lotteries of each observation. Our result is quite general and can be applied to any compact set of prizes and any choice correspondence.