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Living with Risk

Author

Listed:
  • Larry G. Epstein

Abstract

Living with risk can lead to anticipatory feelings such as anxiety or hopefulness. Such feelings can affect the choice between lotteries that will be played out in the future—choice may be motivated not only by the (static) risks involved but also by the desire to reduce anxiety or to promote savouring. This paper provides a model of preference in a three-period setting that is axiomatic and includes a role for anticipatory feelings. It is shown that the model of preference can accommodate intuitive patterns of demand for information such as information seeking when a favourable outcome is very likely and information aversion when it is more likely that the outcome will be unfavourable. Behavioural meaning is given to statements such as "individual 1 is anxious" and "2 is more anxious than 1". Finally, the model is differentiated sharply from the classic model due to Kreps and Porteus. Copyright 2008, Wiley-Blackwell.

Suggested Citation

  • Larry G. Epstein, 2008. "Living with Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(4), pages 1121-1141.
    • Handle: RePEc:oup:restud:v:75:y:2008:i:4:p:1121-1141
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2008.00504.x
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    Cited by:

    1. Jinrui Pan & Craig S. Webb & Horst Zank, 2019. "Delayed probabilistic risk attitude: a parametric approach," Theory and Decision, Springer, vol. 87(2), pages 201-232, September.
    2. Florian Zimmermann, 2015. "Clumped or Piecewise? Evidence on Preferences for Information," Management Science, INFORMS, vol. 61(4), pages 740-753, April.
    3. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," Working Papers halshs-00797631, HAL.
    4. A. Alventosa & Y. Gómez & V. Martínez-Molés & J. Vila, 2016. "Location and Innovation Optimism: a Behavioral-Experimental Approach," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 7(4), pages 890-904, December.
    5. Eisenbach, Thomas M. & Schmalz, Martin C., 2016. "Anxiety in the face of risk," Journal of Financial Economics, Elsevier, vol. 121(2), pages 414-426.
    6. Dillenberger, David & Rozen, Kareen, 2015. "History-dependent risk attitude," Journal of Economic Theory, Elsevier, vol. 157(C), pages 445-477.
    7. Larry G. Epstein & Emmanuel Farhi & Tomasz Strzalecki, 2014. "How Much Would You Pay to Resolve Long-Run Risk?," American Economic Review, American Economic Association, vol. 104(9), pages 2680-2697, September.
    8. Eddie Dekel & Barton L. Lipman, 2010. "How (Not) to Do Decision Theory," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 257-282, September.
    9. Wiafe, Osei K. & Basu, Anup K. & Chen, John, 2017. "The effects of age pension on retirement drawdown choices," Finance Research Letters, Elsevier, vol. 20(C), pages 81-87.
    10. Nikolaus Schweizer & Nora Szech, 2018. "Optimal Revelation of Life-Changing Information," Management Science, INFORMS, vol. 64(11), pages 5250-5262, November.
    11. Thomas Epper & Helga Fehr-Duda, 2012. "The missing link: unifying risk taking and time discounting," ECON - Working Papers 096, Department of Economics - University of Zurich, revised Oct 2018.
    12. Pagel, Michaela & Olafsson, Arna, 2017. "The Ostrich in Us: Selective Attention to Financial Accounts, Income, Spending, and Liquidity," CEPR Discussion Papers 12259, C.E.P.R. Discussion Papers.
    13. Dag Sommervoll, 2013. "Sweet self-deception," Journal of Economics, Springer, vol. 109(1), pages 73-88, May.
    14. Mohammed Abdellaoui & Enrico Diecidue & Emmanuel Kemel & Ayse Onculer, 2021. "Temporal Risk Resolution: Utility versus Probability Weighting Approaches," Working Papers hal-03330225, HAL.
    15. Mohammed Abdellaoui & Enrico Diecidue & Emmanuel Kemel & Ayse Onculer, 2022. "Temporal Risk: Utility vs. Probability Weighting," Management Science, INFORMS, vol. 68(7), pages 5162-5186, July.
    16. Daniel Bennett & Stefan Bode & Maja Brydevall & Hayley Warren & Carsten Murawski, 2016. "Intrinsic Valuation of Information in Decision Making under Uncertainty," PLOS Computational Biology, Public Library of Science, vol. 12(7), pages 1-21, July.
    17. Alexander L. Brown & Hwagyun Kim, 2014. "Do Individuals Have Preferences Used in Macro-Finance Models? An Experimental Investigation," Management Science, INFORMS, vol. 60(4), pages 939-958, April.
    18. Edoardo Grillo, 2014. "Reference Dependence and Politicians' Credibility," Carlo Alberto Notebooks 353, Collegio Carlo Alberto.
    19. , & ,, 2015. "Hidden actions and preferences for timing of resolution of uncertainty," Theoretical Economics, Econometric Society, vol. 10(2), May.
    20. Todd Sarver, 2012. "Optimal Reference Points and Anticipation," Discussion Papers 1566, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    21. Brownback, Andy & Kuhn, Michael A., 2019. "Understanding outcome bias," Games and Economic Behavior, Elsevier, vol. 117(C), pages 342-360.
    22. David Dillenberger & Kareen Rozen, 2010. "Disappointment Cycles," PIER Working Paper Archive 10-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    23. David Dillenberger & Kareen Rozen, 2010. "History-Dependent Risk Attitude," Levine's Bibliography 661465000000000184, UCLA Department of Economics.
    24. Thomas M. Eisenbach & Martin C. Schmalz, 2015. "Anxiety and pro-cyclical risk taking with Bayesian agents," Staff Reports 711, Federal Reserve Bank of New York.
    25. Edoardo Grillo, 2013. "Reference Dependence, Risky Projects and Credible Information Transmission," Carlo Alberto Notebooks 331, Collegio Carlo Alberto.

    More about this item

    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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