Dependence uncertainty: a decision-theoretic approach

Gerrit Bauch and Lorenz Hartmann

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Abstract: Individual risks are often better understood than their dependence. We axiomatize choice under dependence uncertainty on finite product state spaces. Preferences reveal utility and marginal beliefs, while acts are evaluated by an act-dependent weighting of worst- and best-case expected utility over all joint distributions consistent with the marginals. We characterize independence-based behavior, which may reflect either justified beliefs or correlation neglect, and introduce dependence premia as well as a comparative ordering of dependence aversion. We classify acts by their exposure to dependence and characterize independence axioms under which the worst-best weight is constant within each class. Finally, we characterize the geometry and extreme points of the dependence uncertainty set, connecting the behavioral analysis to a copula perspective that does not require real-valued random variables.

Date: 2025-03, Revised 2026-09
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