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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NBER Working Papers
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- 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.
- David Dillenberger & Kareen Rozen, 2011. "History-Dependent Risk Attitude," Levine's Working Paper Archive 786969000000000066, David K. Levine.
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- 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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