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Preferences for One‐Shot Resolution of Uncertainty and Allais‐Type Behavior
Author(s) -
Dillenberger David
Publication year - 2010
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta8219
Subject(s) - shot (pellet) , resolution (logic) , one shot , type (biology) , statistics , computer science , mathematics , artificial intelligence , chemistry , biology , engineering , ecology , mechanical engineering , organic chemistry
Experimental evidence suggests that individuals are more risk averse when they perceive risk that is gradually resolved over time. We address these findings by studying a decision maker who has recursive, nonexpected utility preferences over compound lotteries. The decision maker has preferences for one‐shot resolution of uncertainty if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic preferences for one‐shot resolution of uncertainty and static preferences that are identified with commonly observed behavior in Allais‐type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium.