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Dynamic Decision Making when Risk Perception Depends on Past Experience

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  • Michèle Cohen

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Johanna Etner

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, LIRAES - Université Paris V - Paris Descartes)

  • Meglena Jeleva

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, GAINS - Université du Maine)

Abstract

The aim of the paper is to propose a preferences representation model under risk where risk perception can be past experience dependent. A first step consists in considering a one period decision problem where individual preferences are no more defined only on decisions but on pairs (decision, past experience). The obtained criterion is used in the construction of a dynamic choice model under risk. The paper ends with an illustrative example concerning insurance demand. Itappears that our model allows to explain modifications in the insurance demand behavior over time observed on the insurance markets for catastrophic risk and difficult to justify with standard models.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00211942.

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Date of creation: Mar 2008
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Publication status: Published, Theory and Decision, 2008, 64, 2-3, 173-192
Handle: RePEc:hal:cesptp:halshs-00211942

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00211942
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Related research

Keywords: dynamic decision making - past experience - rank dependent utility model - recursive model - risk perception;

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  1. Philip Ganderton & David Brookshire & Michael McKee & Steve Stewart & Hale Thurston, 2000. "Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, Springer, vol. 20(3), pages 271-289, May.
  2. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 27(4), pages 1622-68, December.
  3. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 485, University of Rochester - Center for Economic Research (RCER).
  4. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 185-200, January.
  5. Ganderton, Philip T, et al, 2000. " Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, Springer, vol. 20(3), pages 271-89, May.
  6. Caplin, Andrew & Leahy, John, 1997. "Psychological Expected Utility Theory and Anticipatory Feelings," Working Papers, C.V. Starr Center for Applied Economics, New York University 97-37, C.V. Starr Center for Applied Economics, New York University.
  7. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  8. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 62(2), pages 283-322, March.
  9. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, American Finance Association, vol. 58(3), pages 1009-1032, 06.
  10. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2006. "Recursive Smooth Ambiguity Preferences," Carlo Alberto Notebooks, Collegio Carlo Alberto 17, Collegio Carlo Alberto, revised 2008.
  11. McClelland, Gary H & Schulze, William D & Coursey, Don L, 1993. " Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events," Journal of Risk and Uncertainty, Springer, Springer, vol. 7(1), pages 95-116, August.
  12. Browne, Mark J & Hoyt, Robert E, 2000. " The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, Springer, vol. 20(3), pages 291-306, May.
  13. Quiggin, John, 1991. " Comparative Statics for Rank-Dependent Expected Utility Theory," Journal of Risk and Uncertainty, Springer, Springer, vol. 4(4), pages 339-50, December.
  14. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(4), pages S251-78, October.
  15. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, Springer, vol. 12(2-3), pages 171-87, May.
  16. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 95-115, January.
  17. Chateauneuf, Alain, 1999. "Comonotonicity axioms and rank-dependent expected utility theory for arbitrary consequences," Journal of Mathematical Economics, Elsevier, vol. 32(1), pages 21-45, August.
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Cited by:
  1. Langlais, Eric, 2009. "les criminels aiment-ils le risque ?
    [Are criminals risk-seeking individulas ?]
    ," MPRA Paper 14892, University Library of Munich, Germany.
  2. Robin Cubitt & Maria Ruiz-Martos & Chris Starmer, 2012. "Are bygones bygones?," Theory and Decision, Springer, Springer, vol. 73(2), pages 185-202, August.
  3. Harvey, Michael & Griffith, David & Kiessling, Tim & Moeller, Miriam, 2011. "A multi-level model of global decision-making: Developing a composite global frame-of-reference," Journal of World Business, Elsevier, Elsevier, vol. 46(2), pages 177-184, April.
  4. repec:hal:journl:halshs-00348810 is not listed on IDEAS

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