Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know For Sure
AbstractWe show that for a disappointment-averse decision maker, splitting a lottery into several stages reduces its value. To do this, we extend Gul.s (1991) model of disappointment aversion into a dynamic setting while keeping its basic characteristics intact. The result depends solely on the sign of the coefficient of disappointment aversion. It can help explain why people often buy periodic insurance for moderately priced objects, such as electrical appliances and cellular phones, at much more than the actuarially fair rate.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-025.
Length: 16 pages
Date of creation: 28 Jul 2010
Date of revision:
Disappointment aversion; recursive preferences; compound lotteries;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- 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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