High Hopes and Disappointment

We study preferences for which choosing high expectations about the future make us happy now but make us unhappy later if they are not realized. These preferences generalize the recursive utility of Kreps-Porteus and Epstein-Zin. Like recursive utility agents, our agents care about the time resolution of uncertainty, but our agents are not purely forward-looking. For example, two agents with the same initial preferences and the same wealth now will feel and behave differently if they are disappointed because they expected to do much better or if they feel lucky because they expected to do much worse. This has some of the flavor of habit formation, but it is different because the effect is there even if there is no intermediate consumption or if both agents consumed the same in the past. Agents with these preferences follow path-dependent strategies even when returns are IID, and they tend to behave somewhat cautiously to guarantee the expectations they have formed, making their apparent risk aversion path-dependent.