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A Theory of Disappointment Aversion

1991; Wiley; Volume: 59; Issue: 3 Linguagem: Inglês

10.2307/2938223

1468-0262

Faruk Gül,

Economic theories and models

An axiomatic model of preferences over lotteries is developed. It is shown that this model is consistent with the Allais paradox, includes expected utility theory as a special case, and is only one parameter ( beta) richer than the expected utility model. Allais paradox type behavior is identified with positive values of beta. Preferences with positive beta are said to be disappointment averse. It is shown that risk aversion implies disappointment aversion and that the Arrow-Pratt measures of risk aversion can be generalized in a straight-forward manner to the current framework. Copyright 1991 by The Econometric Society.