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

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Author Info
David Dillenberger () (Department of Economics, University of Pennsylvania)
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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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
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Handle: RePEc:pen:papers:08-036

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

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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Cited by:
(explanations, 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.)

  1. Alaoui, Larbi, 2009. "The value of useless information," MPRA Paper 11411, University Library of Munich, Germany. [Downloadable!]
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