Living with Risk

Larry Epstein ()

Review of Economic Studies, 2008, vol. 75, issue 4, pages 1121-1141

Abstract: Living with risk can lead to anticipatory feelings such as anxiety or hopefulness. Such feelings can affect the choice between lotteries that will be played out in the future-choice may be motivated not only by the (static) risks involved but also by the desire to reduce anxiety or to promote savouring. This paper provides a model of preference in a three-period setting that is axiomatic and includes a role for anticipatory feelings. It is shown that the model of preference can accommodate intuitive patterns of demand for information such as information seeking when a favourable outcome is very likely and information aversion when it is more likely that the outcome will be unfavourable. Behavioural meaning is given to statements such as "individual 1 is anxious" and "2 is more anxious than 1". Finally, the model is differentiated sharply from the classic model due to Kreps and Porteus. Copyright © 2008 The Review of Economic Studies Limited.

Date: 2008
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