Subjective independence and concave expected utility

Ehud Lehrer, Roee Teper

Research output: Contribution to journalArticlepeer-review

Abstract

When a potential hedge between alternatives does not reduce the exposure to uncertainty, we say that the decision maker considers these alternatives structurally similar. We offer a novel approach and suggest that structural similarity is subjective and should be different across decision makers. Structural similarity can be recovered through a property of the individual's preferences referred to as subjective codecomposable independence. This property characterizes a class of event-separable models and allows us to differentiate between perception of uncertainty and attitude towards it. In addition, our approach provides a behavioral foundation to Concave Expected Utility preferences.

Original languageEnglish
Pages (from-to)33-53
Number of pages21
JournalJournal of Economic Theory
Volume158
Issue numberPA
DOIs
StatePublished - 1 Jul 2015

Keywords

  • Choquet expected utility
  • Codecomposable independence
  • Concave expected utility
  • Machina paradox
  • Subjective independence
  • Uncertainty aversion

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