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

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  • Dillenberger, David

Abstract

Experimental evidence suggests that individuals are more risk averse when they perceive risk gradually. We address these findings by studying 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 if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic preferences for one-shot resolution of uncertainty and static preferences that are identified with the behavior observed in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, preferences for one-shot resolution of uncertainty capture narrow framing.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8342.

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Date of creation: 09 Apr 2008
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Handle: RePEc:pra:mprapa:8342

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Citations

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Cited by:
  1. Simone Cerreia-Vioglio & David Dillenberger & Pietro Ortoleva, 2013. "Cautious Expected Utility and the Certainty Effect," PIER Working Paper Archive 13-037, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. David Dillenberger & Uzi Segal, 2012. "Recursive Ambiguity and Machina's Examples," Boston College Working Papers in Economics 800, Boston College Department of Economics.
  3. David Dillenberger & Uzi Segal, 2013. "Skewed Noise," Boston College Working Papers in Economics 843, Boston College Department of Economics.
  4. Shiri Artstein-Avidan & David Dillenberger, 2010. "Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know For Sure," PIER Working Paper Archive 10-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. Larbi Alaoui, 2012. "The value of useless information," Working Papers 625, Barcelona Graduate School of Economics.
  6. Botond Kőszegi, 2010. "Utility from anticipation and personal equilibrium," Economic Theory, Springer, vol. 44(3), pages 415-444, September.
  7. Alaoui, Larbi, 2008. "The value of useless information," MPRA Paper 11411, University Library of Munich, Germany.
  8. David Dillenberger & Uzi Segal, 2013. "Skewed Noise," PIER Working Paper Archive 13-066, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Mark Dean & Pietro Ortoleva, 2012. "Allais, Ellsberg, and Preferences for Hedging," Working Papers 2012-2, Brown University, Department of Economics.

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