Subjective Independence and Concave Expected Utility
No 5865, Working Paper from Department of Economics, University of Pittsburgh
When a potential hedge between alternatives does not reduce the exposureto uncertainty, we say that the decision maker considers these alternativesstructurally similar. We o er a novel approach and suggest that structural similarityis subjective and should be diff erent across decision makers. Structural similaritycan be recovered through a property of the individual's preferences referred to assubjective codecomposable independence. This property characterizes a class of event-separablemodels and allows us to diff erentiate between perception of uncertainty andattitude towards it. In addition, our approach provides a behavioral foundation toConcave Expected Utility preferences.
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