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

46 Pages Posted: 29 Sep 2009

See all articles by David Dillenberger

David Dillenberger

University of Pennsylvania - Department of Economics

Date Written: September 23, 2009

Abstract

Experimental evidence suggests that individuals are more risk averse when they perceive risk that is gradually resolved over time. We address these findings by studying a decision maker (DM) who has recursive, non-expected utility preferences over compound lotteries. 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 commonly observed behavior in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, PORU captures "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, Second Version (September 23, 2009). Pennsylvania Institute for Economic Research Working Paper No. 09-033. Available at SSRN: https://ssrn.com/abstract=1479531 or http://dx.doi.org/10.2139/ssrn.1479531

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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