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Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior, Second Version

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  • David Dillenberger

    () (Department of Economics)

Abstract

Experimental evidence suggests that individuals are more risk averse when they perceive risk that is gradually resolved over time. We address these findings by studying a decision maker (DM) who has recursive, non-expected utility preferences over compound lotteries. DM has preferences for one-shot resolution of uncertainty (PORU) if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic PORU and static preferences that are identified with commonly observed behavior in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, PORU captures “loss aversion with narrow framing.”

Suggested Citation

  • David Dillenberger, 2008. "Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior, Second Version," PIER Working Paper Archive 09-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 23 Sep 2009.
  • Handle: RePEc:pen:papers:09-033
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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/09-033.pdf
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    References listed on IDEAS

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    1. Yochanan Shachmurove, 2006. "An Excursion into the Venture Capital Industry Stratified by Locations and Industries 1996-2005," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 11(3), pages 79-104, Fall.
    2. Yochanan Shachmurove, 2009. "Entrepreneurship in Oman," PIER Working Paper Archive 09-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. Constant, Amelie F. & Shachmurove, Yochanan, 2003. "Entrepreneurial Ventures and Wage Differentials Between Germans and Immigrants," IZA Discussion Papers 879, Institute for the Study of Labor (IZA).
    4. Mitchell Kellman & Trevor Roxo & Yochanan Shachmurove, 2003. "Entrepreneurial Failure and South Africa's Performance in the World Trading Environment," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 8(3), pages 1-15, Fall.
    5. Constant, Amelie F. & Shachmurove, Yochanan & Zimmermann, Klaus F., 2003. "What Makes an Entrepreneur and Does It Pay? Native Men, Turks, and Other Migrants in Germany," IZA Discussion Papers 940, Institute for the Study of Labor (IZA).
    6. Martin, John D. & Petty, J. William, 1983. "An Analysis of the Performance of Publicly Traded Venture Capital Companies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(03), pages 401-410, September.
    7. Yochanan Shachmurove, 2001. "Annualized Returns of Venture-Backed Public Companies Categorized by Stage of Financing: An Empirical Investigation of IPOS in the Last Three Decades," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 6(1), pages 44-58, Spring.
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    More about this item

    Keywords

    Recursive preferences over compound lotteries; resolution of uncertainty; Allais paradox; narrow framing; negative certainty independence;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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