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Regret in Dynamic Decision Problems

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Author Info
Daniel Krähmer (Freie Universität Berlin, Institut für Wirtschaftstheorie, Boltzmannstr. 20, 14195 Berlin, Germany, +49-(0)30-83855223, kraehmer@wiwiss.fu-berlin.de)
Rebecca Stone (ELSE - Department of Economics, University College London, Gower Street, London WC1E 6BT, UK, +44-(0)20-7679 5894, rebecca.stone@ucl.ac.uk)
Abstract

The paper proposes a framework to extend regret theory to dynamic contexts. The key idea is to conceive of a dynamic decision problem with regret as an intra-personal game in which the agent forms conjectures about the behaviour of the various counterfactual selves that he could have been. We derive behavioural implications in situations in which payoffs are correlated across either time or contingencies. In the first case, regret might lead to excess conservatism or a tendency to make up for missed opportunities. In the second case, behaviour is shaped by the agent’s self-conception. We relate our results to empirical evidence.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 71.

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Date of creation: Jul 2005
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Handle: RePEc:trf:wpaper:71

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Related research
Keywords: Regret Counterfactual Reasoning Reference Dependence Information Aversion

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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  3. Larrick, Richard P. & Boles, Terry L., 1995. "Avoiding Regret in Decisions with Feedback: A Negotiation Example," Organizational Behavior and Human Decision Processes, Elsevier, vol. 63(1), pages 87-97, July. [Downloadable!] (restricted)
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    Other versions:
  13. Camerer, Colin F. & Weber, Roberto A., 1998. "The Econometrics and Behavioral Economics of Escalation of Commitment: A Re-examination of Staw and Hoang's NBA Data," Working Papers 1043, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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