Document Type
Discussion Paper
Publication Date
8-1-2010
CFDP Number
1763
CFDP Revision Date
2013-02-01
CFDP Pages
44
Abstract
We propose a model of history-dependent risk attitude, allowing a decision maker’s risk attitude to be affected by his history of disappointments and elations. The decision maker recursively evaluates compound risks, classifying realizations as disappointing or elating using a threshold rule. We establish equivalence between the model and two cognitive biases: risk attitudes are reinforced by experiences (one is more risk averse after disappointment than after elation) and there is a primacy effect (early outcomes have the greatest impact on risk attitude). In dynamic asset pricing, the model yields volatile, path-dependent prices.
Recommended Citation
Dillenberger, David and Rozen, Kareen, "History-Disappointment Risk Attitude" (2010). Cowles Foundation Discussion Papers. 2098.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2098