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History-Dependent Risk Attitude


  • David Dillenberger
  • Kareen Rozen


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.
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Suggested Citation

  • David Dillenberger & Kareen Rozen, 2011. "History-Dependent Risk Attitude," Levine's Working Paper Archive 786969000000000066, David K. Levine.
  • Handle: RePEc:cla:levarc:786969000000000066

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    Cited by:

    1. Eisenbach, Thomas M. & Schmalz, Martin C., 2016. "Anxiety in the face of risk," Journal of Financial Economics, Elsevier, vol. 121(2), pages 414-426.
    2. Gibson,John & Mckenzie,David J. & Rohorua,Halahingano & Stillman,Steven, 2016. "The long-term impact of international migration on economic decision-making : evidence from a migration lottery and lab-in-the-field experiments," Policy Research Working Paper Series 7848, The World Bank.
    3. Paola Manzini & Marco Mariotti, 2015. "State dependent choice," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(2), pages 239-268, September.
    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.

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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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