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Rational addiction with learning and regret

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  • Athanasios Orphanides
  • David Zervos

Abstract

The authors present a theory of rational behavior in which individuals maximize a set of stable preferences over goods with unknown addictive power. The theory is based on three fundamental postulates: consumption of the addictive good is not equally harmful to all, individuals possess subjective beliefs concerning this harm, and beliefs are optimally updated with information gained through consumption. Although individual actions are optimal and dynamically consistent, addicts regret their past consumption decisions and their initial assessment of the potential harm of the good. Addict-prone individuals who believe 'it could not happen to them' are most likely to be drawn into a harmful addiction. Copyright 1995 by University of Chicago Press.
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Suggested Citation

  • Athanasios Orphanides & David Zervos, 1992. "Rational addiction with learning and regret," Finance and Economics Discussion Series 216, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:216
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