An approximate dual-self model and paradoxes of choice under risk
AbstractWe derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-034.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Drew Fudenberg & David K. Levine & Zacharias Maniadis, 2012. "An Approximate Dual-Self Model and Paradoxes of Choice under Risk," Levine's Working Paper Archive 786969000000000472, David K. Levine.
- NEP-ALL-2012-09-30 (All new papers)
- NEP-BEC-2012-09-30 (Business Economics)
- NEP-MAC-2012-09-30 (Macroeconomics)
- NEP-MIC-2012-09-30 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2006. "Who is “Behavioral”? Cognitive Ability and Anomalous Preferences," Levine's Working Paper Archive 122247000000001334, David K. Levine.
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