An Approximate Dual-Self Model and Paradoxes of Choice Under Risk

FRB of St. Louis Working Paper No. 2012-034A

Posted: 19 Sep 2012

See all articles by Drew Fudenberg

Drew Fudenberg

Massachusetts Institute of Technology (MIT)

David K. Levine

Washington University in St. Louis - Department of Economics; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Zacharias Maniadis

University of Southampton

Date Written: August 1, 2012

Abstract

We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.

Keywords: common ratio effect, dual-self process, Allais paradox, self-control

JEL Classification: D01, D03

Suggested Citation

Fudenberg, Drew and Levine, David K. and Maniadis, Zacharias, An Approximate Dual-Self Model and Paradoxes of Choice Under Risk (August 1, 2012). FRB of St. Louis Working Paper No. 2012-034A. Available at SSRN: https://ssrn.com/abstract=2149017

Drew Fudenberg

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

David K. Levine (Contact Author)

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://www.dklevine.com

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Zacharias Maniadis

University of Southampton ( email )

Register to save articles to
your library

Register

Paper statistics

Abstract Views
192
PlumX Metrics