Dynamic decision-making when ambiguity attitudes depend on exogenous events

Johanna Etner (), Meglena Jeleva and Olivier Renault
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Johanna Etner: Economix, University Paris Lumières, Univ Paris Nanterre, CNRS
Meglena Jeleva: Economix, University Paris Lumières, Univ Paris Nanterre, CNRS
Olivier Renault: Economix, University Paris Lumières, Univ Paris Nanterre, CNRS

Theory and Decision, 2024, vol. 96, issue 2, No 4, 269-295

Abstract: Abstract The aim of this paper is to propose a preferences representation model where ambiguity attitudes can be exogenous events or past experience-dependent. We adapt the Recursive Smooth Ambiguity model proposed by Klibanoff (Journal of Economic Theory 144:930-976, 2009) by introducing past experience described by a sequence of neutral events occurring up to the moment of the decision. These neutral events do not provide any information on the true process, but are likely to strengthen or weaken the decision-maker’s ambiguity aversion degree by modifying emotions. Our model can explain some observed behaviors and market inefficiencies. We propose two illustrations. First, we provide a behavioral explanation for the decrease in influenza vaccination in France that followed the H1N1 crisis in 2009–2010. Second, we contribute to the broad literature on the annuity puzzle by introducing the impact of emotions on ambiguity attitudes.

Keywords: Dynamic decision-making under ambiguity; Recursive smooth ambiguity model; Emotions (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11238-023-09948-6

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