Twofold Multiprior Preferences and Failures of Contingent Reasoning

TL;DR

This paper introduces a novel model of incomplete twofold multiprior preferences that explains failures in contingent reasoning and has implications for choice theory and auction design.

Contribution

It proposes a new preference model that captures contingent reasoning failures and explores its theoretical properties and applications.

Findings

The model explains why contingent reasoning can fail in decision-making.

It yields rich comparative statics and extension exercises.

An application to second-price auctions demonstrates practical relevance.

Abstract

We propose a model of incomplete \textit{twofold multiprior preferences}, in which an act $f$ is ranked above an act $g$ only when $f$ provides higher utility in a worst-case scenario than what $g$ provides in a best-case scenario. The model explains failures of contingent reasoning, captured through a weakening of the state-by-state monotonicity (or dominance) axiom. Our model gives rise to rich comparative statics results, as well as extension exercises, and connections to choice theory. We present an application to second-price auctions.