History-Disappointment Risk Attitude
CFDP Revision Date
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.
Dillenberger, David and Rozen, Kareen, "History-Disappointment Risk Attitude" (2010). Cowles Foundation Discussion Papers. 2098.