Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know for Sure

16 Pages Posted: 30 Jul 2010

See all articles by Shiri Artstein-Avidan

Shiri Artstein-Avidan

Tel Aviv University - School of Mathematical Sciences

David Dillenberger

University of Pennsylvania - Department of Economics

Date Written: July 28, 2010

Abstract

We show that for a disappointment-averse decision maker, splitting a lottery into several stages reduces its value. To do this, we extend Gul's (1991) model of disappointment aversion into a dynamic setting while keeping its basic characteristics intact. The result depends solely on the sign of the coefficient of disappointment aversion. It can help explain why people often buy periodic insurance for moderately priced objects, such as electrical appliances and cellular phones, at much more than the actuarially fair rate.

Keywords: Disappointment aversion, recursive preferences, compound lotteries

JEL Classification: D03,D80,D81

Suggested Citation

Artstein-Avidan, Shiri and Dillenberger, David, Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know for Sure (July 28, 2010). PIER Working Paper No. 10-025. Available at SSRN: https://ssrn.com/abstract=1651223 or http://dx.doi.org/10.2139/ssrn.1651223

Shiri Artstein-Avidan

Tel Aviv University - School of Mathematical Sciences ( email )

Tel Aviv 69978
Israel

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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