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Regret Aversion, Regret Neutrality, and Risk Aversion in Production

Author

Listed:
  • Xu GUO

    (School of Statistics, Beijing Normal University, Beijing.)

  • Wing-Keung WONG

    (Department of Finance and Big Data Research Center, Asia University; Department of Economics and Finance, Hang Seng Management College; Department of Economics, Lingnan University)

Abstract

Previous studies focus on the comparison of the optimal output levels of regret-averse firms under uncertainty and firms under certainty. This paper extends the theory by investigating the effects of both regret-aversion and regret-neutrality on production. We compare the optimal output levels of both regret-averse and regret-neutral firms with purely risk-averse firms under uncertainty and firms under certainty. We first show that the regret-neutral ?rms will surely produce more than its purely risk-averse counterparts and surely produce less than firms under certainty. Thereafter, we give sufficient conditions to ensure the regret-averse firms to produce more than both purely risk-averse and regret-neutral counterparts and study the comparative statics of the optimal production. We also develop properties of regret aversion on production in a binary model. The finding in this paper is useful for production managers in their decision on the production.

Suggested Citation

  • Xu GUO & Wing-Keung WONG, 2017. "Regret Aversion, Regret Neutrality, and Risk Aversion in Production," Economic Growth Centre Working Paper Series 1709, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:1709
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    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2017/2017-09.pdf
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    Keywords

    Production; Regret aversion; Regret neutrality; Risk aversion; Regret theory; Uncertainty.;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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