History-Dependent Risk Attitude

David Dillenberger () and Kareen Rozen ()
Additional contact information
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 (HDRA), allowing the attitude of a decision-maker (DM) towards risk at each stage of a T-stage lottery to evolve as a function of his history of disappointments and elations in prior stages. We establish an equivalence between the existence of an HDRA representation and two documented cognitive biases. First, the DM’s risk attitudes are reinforced by prior experiences: he becomes more risk averse after suffering a disappointment and less risk averse after being elated. Second, the DM displays a primacy effect: early outcomes have the strongest effect on risk attitude. Furthermore, the DM lowers his threshold for elation after a disappointing outcome and raises it after an elating outcome; this makes disappointment more likely after elation and vice-versa, leading to statistically reversing risk attitudes. “Gray areas†in the elation-disappointment assignment are connected to optimism and pessimism in determining endogenous reference points.

Keywords: history-dependent risk attitude; statistically reversing risk attitudes; reinforcement effect; primacy effect; endogenous reference dependence; betweenness; optimism; pessimism (search for similar items in EconPapers)
JEL-codes: D03 D81 D91 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-02-14
New Economics Papers: this item is included in nep-cbe, nep-cis and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://economics.sas.upenn.edu/sites/default/file ... ng-papers/11-004.pdf (application/pdf)

Related works:
Journal Article: History-dependent risk attitude (2015)
Working Paper: History-Dependent Risk Attitude (2012)
Working Paper: History-Dependent Risk Attitude (2011)
Working Paper: History-Dependent Risk Attitude (2010)
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:pen:papers:11-004

Access Statistics for this paper

More papers in PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 133 South 36th Street, Philadelphia, PA 19104. Contact information at EDIRC.
Bibliographic data for series maintained by Administrator ().