Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know For Sure
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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- Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005.
"Why stocks may disappoint,"
Journal of Financial Economics,
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- David Dillenberger & Kareen Rozen, 2011.
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PIER Working Paper Archive
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- David Dillenberger & Kareen Rozen, 2010. "History-Dependent Risk Attitude," Cowles Foundation Discussion Papers 1763, Cowles Foundation for Research in Economics, Yale University, revised Jul 2012.
- David Dillenberger & Kareen Rozen, 2011. "History-Dependent Risk Attitude," Levine's Working Paper Archive 786969000000000066, David K. Levine.
- David Dillenberger & Kareen Rozen, 2010. "History-Dependent Risk Attitude," Levine's Bibliography 661465000000000184, UCLA Department of Economics.
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- Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
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