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An approximate dual-self model and paradoxes of choice under risk

Author

Listed:
  • Drew Fudenberg
  • David K. Levine
  • Zacharias Maniadis

Abstract

We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.

Suggested Citation

  • Drew Fudenberg & David K. Levine & Zacharias Maniadis, 2012. "An approximate dual-self model and paradoxes of choice under risk," Working Papers 2012-034, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2012-034
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    References listed on IDEAS

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    1. Simonson, Itamar, 1989. " Choice Based on Reasons: The Case of Attraction and Compromise Effects," Journal of Consumer Research, Oxford University Press, pages 158-174.
    2. Keren, Gideon & Roelofsma, Peter, 1995. "Immediacy and Certainty in Intertemporal Choice," Organizational Behavior and Human Decision Processes, Elsevier, pages 287-297.
    3. David K. Levine & Drew Fudenberg, 2006. "A Dual-Self Model of Impulse Control," American Economic Review, American Economic Association, pages 1449-1476.
    4. Drew Fudenberg & David Levine, 2007. "Continuous Time Limits of Repeated Games with Imperfect Public Monitoring," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 173-192, April.
    5. Drew Fudenberg & David K. Levine, 2011. "Risk, Delay, and Convex Self-Control Costs," American Economic Journal: Microeconomics, American Economic Association, pages 34-68.
    6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, pages 263-291.
    7. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, pages 1281-1292.
    8. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," American Economic Review, American Economic Association, pages 164-169.
    9. Manel Baucells & Franz Heukamp, 2010. "Common ratio using delay," Theory and Decision, Springer, pages 149-158.
    10. Drew Fudenberg & David K. Levine, 2012. "Timing and Self‐Control," Econometrica, Econometric Society, pages 1-42.
    11. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2013. "Who Is ‘Behavioral’? Cognitive Ability And Anomalous Preferences," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1231-1255, December.
    12. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    13. Shiv, Baba & Fedorikhin, Alexander, 1999. " Heart and Mind in Conflict: The Interplay of Affect and Cognition in Consumer Decision Making," Journal of Consumer Research, Oxford University Press, pages 278-292.
    14. Drew Fudenberg & David K. Levine, 2012. "Timing and Self‐Control," Econometrica, Econometric Society, pages 1-42.
    15. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, pages 121-154.
    16. David K. Levine & Drew Fudenberg, 2006. "A Dual-Self Model of Impulse Control," American Economic Review, American Economic Association, pages 1449-1476.
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    Cited by:

    1. Gerhardt, Holger & Schildberg-Hörisch, Hannah & Willrodt, Jana, 2017. "Does self-control depletion affect risk attitudes?," European Economic Review, Elsevier, pages 463-487.
    2. Mark Schneider, 2016. "Dual Process Utility Theory: A Model of Decisions Under Risk and Over Time," Working Papers 16-23, Chapman University, Economic Science Institute.
    3. Anna Dreber & Drew Fudenberg & David K Levine & David G Rand, 2014. "Altruism and Self Control," Levine's Working Paper Archive 786969000000000962, David K. Levine.
    4. Martinsson, Peter & Myrseth, Kristian Ove R. & Wollbrant, Conny, 2014. "Social dilemmas: When self-control benefits cooperation," Journal of Economic Psychology, Elsevier, pages 213-236.

    More about this item

    Keywords

    Macroeconomics - Econometric models;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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