Journal Article

Living with Risk

Larry G. Epstein

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 4, pages 1121-1141
Published in print October 2008 | ISSN: 0034-6527
Published online October 2008 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1111/j.1467-937X.2008.00504.x
Living with Risk

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Living with risk can lead to anticipatory feelings such as anxiety or hopefulness. Such feelings can affect the choice between lotteries that will be played out in the future—choice may be motivated not only by the (static) risks involved but also by the desire to reduce anxiety or to promote savouring. This paper provides a model of preference in a three-period setting that is axiomatic and includes a role for anticipatory feelings. It is shown that the model of preference can accommodate intuitive patterns of demand for information such as information seeking when a favourable outcome is very likely and information aversion when it is more likely that the outcome will be unfavourable. Behavioural meaning is given to statements such as “individual 1 is anxious” and “2 is more anxious than 1”. Finally, the model is differentiated sharply from the classic model due to Kreps and Porteus.

Keywords: D81; D82; D83

Journal Article.  11673 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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