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Title:Optimal choice and beliefs with ex ante savoring and ex post disappointment PDF Logo
Authors:Gollier, Christian
Muermann, Alexander
Issue Date:2006
Series/Report no.:CFS Working Paper 2006/28
Abstract:We propose a new decision criterion under risk in which people extract both utility from anticipatory feelings ex ante and disutility from disappointment ex post. The decision maker chooses his degree of optimism, given that more optimism raises both the utility of ex ante feelings and the risk of disappointment ex post. We characterize the optimal beliefs and the preferences under risk generated by this mental process and apply this criterion to a simple portfolio choice/insurance problem. We show that these preferences are consistent with the preference reversal in the Allais’ paradoxes and predict that the decision maker takes on less risk compared to an expected utility maximizer. This speaks to the equity premium puzzle and to the preference for low deductibles in insurance contracts. Keywords: endogenous beliefs, anticipatory feeling, disappointment, optimism, decision under risk, portfolio allocation.
Subjects:Endogenous Beliefs
Anticipatory Feeling
Disappointment
Optimism
Decision Under Risk
Portfolio Allocation
JEL:D81
G11
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-38022
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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