History-Dependent Risk Attitude

David Dillenberger and Kareen Rozen ()
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David Dillenberger: University of Pennsylvania

No 1763, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We propose a model of history-dependent risk attitude, allowing a decision maker’s risk attitude to be affected by his history of disappointments and elations. The decision maker recursively evaluates compound risks, classifying realizations as disappointing or elating using a threshold rule. We establish equivalence between the model and two cognitive biases: risk attitudes are reinforced by experiences (one is more risk averse after disappointment than after elation) and there is a primacy effect (early outcomes have the greatest impact on risk attitude). In dynamic asset pricing, the model yields volatile, path-dependent prices.

Keywords: History-dependent risk attitude; Reinforcement effect; Primacy effect; Dynamic reference dependence (search for similar items in EconPapers)
JEL-codes: D03 D81 D91 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-08, Revised 2012-07
New Economics Papers: this item is included in nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Economic Theory (May 2015), 157: 445-477

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Related works:
Journal Article: History-dependent risk attitude (2015)
Working Paper: History-Dependent Risk Attitude (2011)
Working Paper: History-Dependent Risk Attitude (2011)
Working Paper: History-Dependent Risk Attitude (2010)
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