History-dependent risk attitude

David Dillenberger and Kareen Rozen ()

Journal of Economic Theory, 2015, vol. 157, issue C, 445-477

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 a dynamic asset pricing problem, 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)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Working Paper: History-Dependent Risk Attitude (2012)
Working Paper: History-Dependent Risk Attitude (2011)
Working Paper: History-Dependent Risk Attitude (2011)
Working Paper: History-Dependent Risk Attitude (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:157:y:2015:i:c:p:445-477

DOI: 10.1016/j.jet.2015.01.020

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