Living with risk

Larry Epstein ()

No 534, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: Living with risk can lead to anticipatory feelings such as anxiety or hopefulness. Such feelings can a¤ect 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 savoring. 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 favorable outcome is very likely and information aversion when it is more likely that the outcome will be unfavorable. Behavioral meaning is given to statements such as "individual 1 is anxious" and "2 is more anxious than 1". Finally, the model is di¤erentiated sharply from the classic model due to Kreps and Porteus.

Keywords: risk; anxiety; savoring; anticipatory feelings; demand for commitment; demand for information; temporal resolution of risk; temptation (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-upt
Date: 2007-02
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Journal Article: Living with Risk (2008)
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