Dynamic decision making when risk perception depends on past experience
pp. 19-32
in: Mohammed Abdellaoui, John D. Hey (eds), Advances in decision making under risk and uncertainty, Berlin, Springer, 2008Abstract
Decision theory under risk had for a long time focused mainly on the impact of different risk and wealth perceptions on the agents' optimal decisions. In these classical studies, risk perceptions, as well as utility functions, depend only on the considered decision characteristics (pairs probabilities-outcomes) and thus cannot be influenced by outside factors. However, some psychological studies (see Slovic (2000)) point out the fact that risk perception may be strongly influenced by the context in which the individuals are when they take their decisions. Context can take different forms: (a) it can correspond to past experience (relevant, for instance, in insurance decisions, as noticed in Kunreuther (1996) and Browne and Hoyt (2000) and in stock markets behavior as noticed by Hirshleifer and Shumway (2003)), (b) it can also correspond to anticipatory feelings about some future states (Caplin and Leahy 2001) (c) it can be related to the decision outcomes presentation (leading then to the framing effect pointed out by Tversky and Kahneman (1986)).