Dynamic Disappointment Aversion: Don't Tell Me Anything Until You Know for Sure
16 Pages Posted: 30 Jul 2010
Date Written: July 28, 2010
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: Suggested Citation