The VNM axioms are about preferences over lotteries over commodity bundles, not about preferences over lotteries over world histories. A commodity bundle is some ill-specified, immiscible utility fluid. If you want to change that model by adding an extended timeline of causal repercussions, so that there is enough room in your theory to indirectly account for instrumental preferences, then it seems to me you either have to explain what you mean by world-history bundles (UDT with its program execution histories might be thought of as having preferences over multiple world histories at once), or you should admit that you're throwing out additivity of commodities. Additivity formalized the intuition that more goodness is better, i.e. that preferences scale with quantities of resources or intensities of emotion or frequencies of experience or whatever. That can be offloaded to the specifics of the utility function, and probably should be, but I've never seen anyone state that's how they're thinking.
There is a second, less general way some people alter VNM, by talking about preferences over lotteries over individual events within a timeline. This third form of VNM does not have space enough to account for instrumental utility unless you artificially group together causally related events, like having preferences over lotteries for "1 hour pre-travel preparation time and getting to go to Ecuador". It's still kind of useful for discussion because it exposes that way human preferences are similar for repeatable events, states, and experiences.
Followup to : Is risk aversion really irrational?
After reading the decision theory FAQ and re-reading The Allais Paradox I realized I still don't accept the VNM axioms, especially the independence one, and I started thinking about what my true rejection could be. And then I realized I already somewhat explained it here, in my Is risk aversion really irrational? article, but it didn't make it obvious in the article how it relates to VNM - it wasn't obvious to me at that time.
Here is the core idea: information has value. Uncertainty therefore has a cost. And that cost is not linear to uncertainty.
Let's take a first example: A is being offered a trip to Ecuador, B is being offered a great new laptop and C is being offered a trip to Iceland. My own preference is: A > B > C. I love Ecuador - it's a fantastic country. But I prefer a laptop over a trip to Iceland, because I'm not fond of cold weather (well, actually Iceland is pretty cool too, but let's assume for the sake of the article that A > B > C is my preference).
But now, I'm offered D = (50% chance of A, 50% chance of B) or E = (50% chance of A, 50% chance of C). The VNM independence principle says I should prefer D > E. But doing so, it forgets the cost of information/uncertainty. By choosing E, I'm sure I'll be offered a trip - I don't know where, but I know I'll be offered a trip, not a laptop. By choosing D, I'm no idea on the nature of the present. I've much less information on my future - and that lack of information has a cost. If I know I'll be offered a trip, I can already ask for days off at work, I can go buy a backpack, I can start doing the paperwork to get my passport. And if I know I won't be offered a laptop, I may decide to buy one, maybe not as great as one I would have been offered, but I can still buy one. But if I chose D, I've much less information about my future, and I can't optimize it as much.
The same goes for the Allais paradox: having certitude of receiving a significant amount of money ($24 000) has a value, which is present in choice 1A, but not in all others (1B, 2A, 2B).
And I don't see why a "rational agent" should neglect the value of this information, as the VNM axioms imply. Any thought about that?