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Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know For Sure

  • Shiri Artstein-Avidan

    ()

    (School of Mathematical Sciences, Tel Aviv University)

  • David Dillenberger

    ()

    (Department of Economics, University of Pennsylvania)

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    We show that for a disappointment-averse decision maker, splitting a lottery into several stages reduces its value. To do this, we extend Gul.s (1991) model of disappointment aversion into a dynamic setting while keeping its basic characteristics intact. The result depends solely on the sign of the coefficient of disappointment aversion. It can help explain why people often buy periodic insurance for moderately priced objects, such as electrical appliances and cellular phones, at much more than the actuarially fair rate.

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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/10-025.pdf
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    Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-025.

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    Length: 16 pages
    Date of creation: 28 Jul 2010
    Date of revision:
    Handle: RePEc:pen:papers:10-025
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    1. David Dillenberger & Kareen Rozen, 2011. "History-Dependent Risk Attitude," PIER Working Paper Archive 11-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
    3. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
    4. Dillenberger, David, 2008. "Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior," MPRA Paper 8342, University Library of Munich, Germany.
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