History-Dependent Risk Attitude, Second Version

David Dillenberger () and Kareen Rozen ()
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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 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: 44 pages
Date: 2011-02-14, Revised 2012-07-14
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:12-029

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