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Disappointment Models: an axiomatic approach

  • Thierry Chauveau

    ()

    (Axe Finance - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)

  • Nicolas Nalpas

    ()

    (Toulouse Business School - ESC Toulouse)

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    In this paper, a fully choice-based theory of disappointment is developed. It encompasses, as particular cases, EU theory, Gul's theory of disappointment (1991) and the models of Loomes and Sugden (1986). According to the new theory, the risk premium of a random prospect is the sum of two premiums: a concavity premium that is nothing but the usual Arrow-Pratt premium and a second premium that may be identified to expected disappointment. The corresponding representing functional belongs to the class of lottery-dependent utility models (Becker and Sarin 1987) since disappointment is the deficit between the utility of the realized outcome and its expected value. However, unlike the lottery-dependent approach, the theory is choice-based and its axioms are experimentally testable.

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    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00560543.

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    Date of creation: Dec 2011
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    Handle: RePEc:hal:cesptp:halshs-00560543
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00560543v3
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