IAI Actuarial Core Principles · Economic Modelling · Rational choice theory and utility
In the expected utility framework used in actuarial economic modelling, which of the following is the von Neumann-Morgenstern axiom that requires that if an individual prefers outcome A to B and B to C, then A must be preferred to C?
The axiom is transitivity. It requires that if A is preferred to B and B is preferred to C, then A is preferred to C. Completeness, independence, continuity and non-satiation address different properties of preferences, so they do not describe this requirement.
- AIndependence
- BTransitivityCorrect
- CContinuity
- DNon-satiation
- Completeness
Explanation
Transitivity states that preferences are consistently ordered: A over B and B over C implies A over C. Completeness only says any two outcomes can be compared. Independence concerns mixing lotteries, and continuity concerns probability mixtures between outcomes. Non-satiation says more wealth is preferred to less.
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