Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior, Second Version
46 Pages Posted: 29 Sep 2009
Date Written: September 23, 2009
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: Suggested Citation