Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior
48 Pages Posted: 14 Oct 2008
Date Written: October 10, 2008
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
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