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Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior

Dillenberger, David (2008): Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior.

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Abstract

Experimental evidence suggests that individuals are more risk averse when they perceive risk gradually. We address these findings by studying a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time. DM 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 the behavior observed 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. In an intertemporal context, preferences for one-shot resolution of uncertainty capture narrow framing.

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