History-Dependent Risk Attitude
AbstractWe propose a model of history-dependent risk attitude, allowing a decision maker’s risk attitude to be affected by his history of disappointments and elations. The decision maker recursively evaluates compound risks, classifying realizations as disappointing or elating using a threshold rule. We establish equivalence between the model and two cognitive biases: risk attitudes are reinforced by experiences (one is more risk averse after disappointment than after elation) and there is a primacy effect (early outcomes have the greatest impact on risk attitude). In dynamic asset pricing, the model yields volatile, path-dependent prices.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1763.
Length: 38 pages
Date of creation: Aug 2010
Date of revision: Jul 2012
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Other versions of this item:
- David Dillenberger & Kareen Rozen, 2010. "History-Dependent Risk Attitude," Levine's Bibliography 661465000000000184, UCLA Department of Economics.
- David Dillenberger & Kareen Rozen, 2010. "History-Dependent Risk Attitude," Levine's Working Paper Archive 661465000000000321, David K. Levine.
- David Dillenberger & Kareen Rozen, 2011. "History-Dependent Risk Attitude," PIER Working Paper Archive 11-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- David Dillenberger & Kareen Rozen, 2011. "History-Dependent Risk Attitude," Levine's Working Paper Archive 786969000000000066, David K. Levine.
- D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-14 (All new papers)
- NEP-NEU-2010-08-14 (Neuroeconomics)
- NEP-UPT-2010-08-14 (Utility Models & Prospect Theory)
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