Living with Risk

Living with risk can lead to anticipatory feelings such as anxiety or hopefulness. Such feelings can a¤ect the choice between lotteries that will be played out in the future choice may be motivated not only by the (static) risks involved but also by the desire to reduce anxiety or to promote savoring. This paper provides a model of preference in a three-period setting that is axiomatic and includes a role for anticipatory feelings. It is shown that the model of preference can accommodate intuitive patterns of demand for information such as information seeking when a favorable outcome is very likely and information aversion when it is more likely that the outcome will be unfavorable. Behavioral meaning is given to statements such as “individual 1 is anxious” and “2 is more anxious than 1”. Finally, the model is di¤erentiated sharply from the classic model due to Kreps and Porteus. Department of Economics, Boston University, Boston MA 02215, [email protected]. The …nancial support of the NSF (award SES-0611456) is gratefully acknowledged. I am grateful also to Kazuya Hyogo, Jawwad Noor, participants at RUD 2007 in Tel Aviv and the 2007 NBER-General Equilibrium Conference at Kellogg, and two referees.