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A theory of disappointment aversion

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BibTeX 

@article{gul1991theory,
  title={A theory of disappointment aversion},
  author={Gul, Faruk},
  journal={Econometrica: Journal of the Econometric Society},
  pages={667--686},
  year={1991},
  publisher={JSTOR}
}

Abstract

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.

My Notes

This paper was recommended to me as an example of a paper with a good intro.

The purpose of the paper is to develop an axiomatic model of decision making under uncertainty that

  • Includes expected utility as a special case
  • is consistent with the Allais Paradox
  • is the most restrictive possible model that satisfies both of the above.

Brief description of structure and restatment of goal

Set up preferences to be one parameter richer than vNM preferences. When this parameter $\beta$ is zero, the we get vNM expected utility. With $\beta$ positive, the agent is strictly “dissapointment averse”.

Risk aversion implies disspointment aversion.

The intro barely spills over on the second page. Could fit on the first without the attributionary footnotes. Very concise.