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An approximate dual-self model and paradoxes of choice under risk

Drew Fudenberg, David Levine () and Zacharias Maniadis

Journal of Economic Psychology, 2014, vol. 41, issue C, 55-67

Abstract: We derive a simplified version of the model of Fudenberg and Levine (2006, 2011) and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marschak–Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.

Keywords: Common ratio effect; Dual-self process; Allais paradox; Self-control (search for similar items in EconPapers)
JEL-codes: D01 D03 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: An approximate dual-self model and paradoxes of choice under risk (2014) Downloads
Working Paper: An Approximate Dual-Self Model and Paradoxes of Choice under Risk (2012) Downloads
Working Paper: An approximate dual-self model and paradoxes of choice under risk (2012) Downloads
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