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Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior

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  • David Dillenberger

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    (Department of Economics, University of Pennsylvania)

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    Abstract

    We study a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time. DM has preferences for one-shot resolution of uncertainty (PORU) if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic PORU and static preferences that are identified with the behavior observed in Allais-type experiments. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, PORU capture "loss aversion with narrow framing".

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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/08-036.pdf
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    Bibliographic Info

    Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 08-036.

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    Length: 47 pages
    Date of creation: 10 Oct 2008
    Date of revision:
    Handle: RePEc:pen:papers:08-036

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    Keywords: recursive preferences over compound lotteries; resolution of uncertainty; Allais paradox; narrow framing; negative certainty independence.;

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    Cited by:
    1. Alaoui, Larbi, 2008. "The value of useless information," MPRA Paper 11411, University Library of Munich, Germany.

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