Quantum-like model of subjective expected utility: A survey of applications to finance

Abstract

In this survey paper we review the potential financial applications of quantum probability (QP) framework of subjective expected utility formalized in [2]. The model serves as a generalization to the classical probability (CP) scheme and relaxes the core axioms of commuta-tivity and distributivity of events. The agents form subjective beliefs via the rules of projective probability calculus and make decisions between prospects or lotteries by employing utility functions and some additional parameters given by a so called ‘comparison operator’. Agents’ comparison between lotteries involves interference effects that denote their risk perceptions from the ambiguity about prospect realisation when making a lottery selection. The above framework that builds upon the assumption of non-commuting lottery observables can have a wide class of applications to finance and asset pricing. We review here a case of an investment in two complementary risky assets about which the agent possesses non-commuting price expectations that give raise to a state dependence in her trading preferences. We summarise by discussing some other behavioural finance applications of the QP based selection behaviour framework.