TITLE

Anticipated regret as an explanation of uncertainty aversion

AUTHOR(S)
Krähmer, Daniel; Stone, Rebecca
PUB. DATE
March 2013
SOURCE
Economic Theory;Mar2013, Vol. 52 Issue 2, p709
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The paper provides a psychological explanation of uncertainty aversion based on the fear of regret. We capture an agent's regret using a reference-dependent utility function in which the agent's utility depends on the performance of his chosen option relative to the performance of the option that would have been best ex post. An uncertain option is represented as a compound lottery. The basic idea is that selecting a compound lottery reveals information, which alters the ex post assessment of what the best choice would have been, inducing regret. We provide sufficient conditions under which regret implies uncertainty aversion in the sense of quasi-concave preferences over compound lotteries.
ACCESSION #
86406854

 

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