History-dependent risk attitude

History-dependent risk attitude

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 rei...

Risk Perception, Risk Attitude and Decision : a Rank-Dependent Approach

The classical expected utility model of decision under risk (von NeumannMorgenstern, 1944) has been criticized from an experimental point of view (Allais’ paradox) as well as for its restrictive lack of explanatory power. The RankDependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions: a utili...

Capturing Intrinsic Risk Attitude

The paper introduces a new concept of intrinsic risk attitude. In contrast to the common Arrow-Pratt measure, the present concept is directly tied to preferences on the multidimensional consumption space and is independent of the way we measure consumption, of the commodity under observation, and of market prices or liquidity constraints. The measure relies on intertemporal choice to distinguis...

Managing Group Risk Attitude

History-Dependent Risk Aversion and the Reinforcement Effect∗

This paper studies history-dependent risk aversion and focuses on a well-documented behavior called the reinforcement effect (RE), which says that people become less riskaverse after a good history than after a bad history. I show that this seemingly anomalous behavior occurs whenever risk preferences are history-dependent (in a nontrivial way) and satisfy monotonicity with respect to first-ord...