Adaptive risk assessments

Kemal Ozbek

Journal of Mathematical Economics, 2023, vol. 106, issue C

Abstract: We model a decision maker who can exert costly effort to adapt her risk assessments, thereby optimizing the value of her risky prospects. We provide an axiomatic characterization of the model and show how costs of adaption can be elicited and compared across individuals. In a moral hazard problem, we show that adapting risk assessments can weaken the effect of monetary incentives for effort provision, which has important implications for agency problems. We provide several examples to illustrate how adapting risk assessments can rationalize many well-known choice anomalies.

Keywords: Adapting risk assessments; Allais paradoxes; Backfiring monetary incentives; Choice anomalies; Desire for basic lottery; Moral hazard (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:106:y:2023:i:c:s0304406823000368

DOI: 10.1016/j.jmateco.2023.102843

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