Precautionary saving under anticipated regret

This study examines the saving behavior of a regret-averse agent within a two-period model. The analysis demonstrates that disproportionate aversion to large regrets induces a pseudo effect resembling probability weighting. In particular, the agent assigns greater weight to states in which significant saving regret might arise. As a result, regret aversion encourages precautionary saving when income shocks are sufficiently negatively skewed but diminishes or even reverses precautionary saving when they are not. The exact skewness condition under which the agent saves more than a discounted utility counterpart is characterized in the context of small binary risks. Notably, this condition becomes more restrictive as the traditional measure of absolute prudence increases. A simulation involving large income shocks further confirms that the qualitative insights derived from the small-risk case extend to broader scenarios, highlighting that regret aversion can substantially influence saving behavior when income risks are skewed.