History-Dependent Risk Attitude
We propose a model of history-dependent risk attitude (HDRA), allowing the attitude of a decision-maker (DM) towards risk at each stage of a T-stage lottery to evolve as a function of his history of disappointments and elations in prior stages. We establish an equivalence between the existence of an HDRA representation and two documented cognitive biases. First, the DM’s risk attitudes are reinforced by prior experiences: he becomes more risk averse after suffering a disappointment and less risk averse after being elated. Second, the DM displays a primacy effect: early outcomes have the strongest effect on risk attitude. Furthermore, the DM lowers his threshold for elation after a disappointing outcome and raises it after an elating outcome; this makes disappointment more likely after elation and vice-versa, leading to statistically reversing risk attitudes. “Gray areas” in the elation-disappointment assignment are connected to optimism and pessimism in determining endogenous reference points.
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Caplin & John Leahy, 2001.
"Psychological Expected Utility Theory And Anticipatory Feelings,"
The Quarterly Journal of Economics,
MIT Press, vol. 116(1), pages 55-79, February.
- Caplin, Andrew & Leahy, John, 1997. "Psychological Expected Utility Theory and Anticipatory Feelings," Working Papers 97-37, C.V. Starr Center for Applied Economics, New York University.
- Rozen, Kareen, 2008.
"Foundations of Intrinsic Habit Formation,"
40, Yale University, Department of Economics.
- Kareen Rozen, 2008. "Foundations of Intrinsic Habit Formation," Levine's Working Paper Archive 122247000000002062, David K. Levine.
- Kareen Rozen, 2008. "Foundations of Intrinsic Habit Formation," Cowles Foundation Discussion Papers 1642, Cowles Foundation for Research in Economics, Yale University.
- Kareen Rozen, 2008. "Foundations of Intrinsic Habit Formation," Cowles Foundation Discussion Papers 1642R, Cowles Foundation for Research in Economics, Yale University, revised Mar 2009.
- Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
- Pascal St-Amour & Stephen Gordon, 2000.
"A Preference Regime Model of Bull and Bear Markets,"
American Economic Review,
American Economic Association, vol. 90(4), pages 1019-1033, September.
- Gordon, Stephen & St-Amour, Pascal, 1999. "A Preference Regime Model of Bull and Bear Markets," Cahiers de recherche 9906, Université Laval - Département d'économique.
- Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005.
"Why stocks may disappoint,"
Journal of Financial Economics,
Elsevier, vol. 76(3), pages 471-508, June.
- Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
- Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
- Ulrike Malmendier & Stefan Nagel, 2011.
"Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 126(1), pages 373-416.
- Ulrike Malmendier & Stefan Nagel, 2009. "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?," NBER Working Papers 14813, National Bureau of Economic Research, Inc.
- Uzi Segal, 2000.
"Two Stage Lotteries Without the Reduction Axiom,"
Levine's Working Paper Archive
7599, David K. Levine.
When requesting a correction, please mention this item's handle: RePEc:cla:levarc:661465000000000321. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine)
If references are entirely missing, you can add them using this form.