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

Shiri Artstein-Avidan () and David Dillenberger ()
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Shiri Artstein-Avidan: School of Mathematical Sciences, Tel Aviv University
David Dillenberger: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: 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.

Keywords: Disappointment aversion; recursive preferences; compound lotteries (search for similar items in EconPapers)
JEL-codes: D03 D80 D81 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2010-07-28
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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