Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior

48 Pages Posted: 14 Oct 2008

See all articles by David Dillenberger

David Dillenberger

University of Pennsylvania - Department of Economics

Date Written: October 10, 2008

Abstract

We study a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time. DM has preferences for one-shot resolution of uncertainty (PORU) if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic PORU and static preferences that are identified with the behavior observed in Allais-type experiments. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, PORU capture "loss aversion with narrow framing".

Keywords: recursive preferences over compound lotteries, resolution of uncertainty, Allais paradox, narrow framing, negative certainty independence

JEL Classification: D80, D81

Suggested Citation

Dillenberger, David, Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior (October 10, 2008). PIER Working Paper No. 08-036. Available at SSRN: https://ssrn.com/abstract=1284375 or http://dx.doi.org/10.2139/ssrn.1284375

David Dillenberger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1503 (Phone)

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