Title

History-Disappointment Risk Attitude

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.

This document is currently not available here.

Share

COinS