Endogenous Risk Attitudes

Nick Netzer, Arthur Robson, Jakub Steiner and Pavel Kocourek

No 9547, CESifo Working Paper Series from CESifo

Abstract: In a model inspired by neuroscience, we show that constrained optimal perception encodes lottery rewards using an S-shaped encoding function and over-samples low-probability events. The implications of this perception strategy for behavior depend on the decision-maker’s understanding of the risk. The strategy does not distort choice in the limit as perception frictions vanish when the decision-maker fully understands the decision problem. If, however, the decision-maker underrates the complexity of the decision problem, then risk attitudes reflect properties of the perception strategy even for vanishing perception frictions. The model explains adaptive risk attitudes and probability weighting as in prospect theory and, additionally, predicts that risk attitudes are strengthened by time pressure and attenuated by anticipation of large risks.

Keywords: endogenous preferences; probability distortions; misspecified learning (search for similar items in EconPapers)
JEL-codes: D81 D87 D91 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cbe, nep-mic, nep-neu, nep-ore, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp9547.pdf (application/pdf)

Related works:
Working Paper: Endogenous Risk Attitudes (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9547

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().