Skip to main content
Log in

Dynamic Decision Making when Risk Perception Depends on Past Experience

  • Published:
Theory and Decision Aims and scope Submit manuscript

Abstract

The aim of the article is to propose a preferences representation under risk where risk perception can be past experience dependent. A first step consists in considering a one-period decision problem where individual preferences are no more defined only on decisions but on pairs (decision, past experience). The obtained criterion is used in the construction of a dynamic choice model under risk. The article ends with an illustrative example concerning insurance demand. It appears that our model allows to explain modifications in the insurance demand behavior over time observed on the insurance markets for catastrophic risk and difficult to justify with standard models.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Browne M., Hoyt R. (2000) The demand for flood insurance: empirical evidence. Journal of risk and uncertainty 20: 291–306

    Article  Google Scholar 

  • Caplin, A. and Leahy, J. (2001), Psychological expected utility theory and anticipatory feeling, The Quarterly Journal of Economics 55–79.

  • Chateauneuf, A. (1999), Comonotonicity axioms and rank-dependent expected utility theory for arbitrary consequences, Journal of Mathematical Economics 21–45.

  • Epstein L., Schneider M. (2003) Recursive multiple priors. Journal of Economic Theory 113: 1–31

    Article  Google Scholar 

  • Epstein L., Wang T. (1994) Intertemporal asset pricing under Knightian uncertainty. Econometrica 62: 283–322

    Article  Google Scholar 

  • Ganderton P., Brookshire D., McKee M., Stewart S., Thurston H. (2000) Buying insurance for disaster-type risk: experimental evidence. Journal of Risk and Uncertainty 20(3): 271–289

    Article  Google Scholar 

  • Hirshleifer, D. and Shumway, T. (2003), Good day sunshine: stock returns and the weather, Journal of Finance 1009–1032.

  • Hayashi T. (2005) Intertemporal substitution, risk aversion and ambiguity aversion. Economic Theory 25(4): 933–956

    Article  Google Scholar 

  • Karni E. (1985) Decision Making under Uncertainty: The Case of State-Dependant Preferences. Harvard University Press, Cambridge

    Google Scholar 

  • Klibanoff, P., Marinacci, M. and Mukerji, S. (2006), Recursive Smooth Ambiguity Preferences, Carlo Alberto Notebooks n°17.

  • Kreps D., Porteus E. (1978) Temporal resolution of uncertainty and Dynamic choice theory. Econometrica 46(1): 185–200

    Article  Google Scholar 

  • Kunreuther H. (1996) Mitigation disaster losses through insurance. Journal of risk and uncertainty 12: 171–187

    Article  Google Scholar 

  • Machina M. (1989) Dynamic consistency and non-expected utility models of choice under uncertainty. Journal of Economic Litterature 27: 1622–1668

    Google Scholar 

  • McClelland G., Schulze W., Coursey D. (1993) Insurance for low-probability hazards: a bimodal response to unlikely events. Journal of risk and uncertainty 7: 95–116

    Article  Google Scholar 

  • McClennen E. (1990) Rationality and Dynamic Choice. Cambridge: Cambridge University Press

    Google Scholar 

  • Papon, T. (2004), L’influence de la durée d’engagement et du vécu dans les décisions d’assurance: deux études expérimentales, Cahiers de la MSE n°40.

  • Quiggin J. (1991) Comparative statics for rank-dependent expected utility theory. Journal of Risk and Uncertainty 4: 329–338

    Article  Google Scholar 

  • Slovic P. (2000) The Perception of Risk. London and Sterling: Earthscan Publications Ltd

    Google Scholar 

  • TverskyA., Kahneman D. (1973) Availability: a heuristic for judging frequency and probability. Cognitive Psychology 5: 207–232

    Article  Google Scholar 

  • Tversky A., Kahneman D. (1986) Rational choice and the framing of decisions. Journal of Business 59: 251–278

    Article  Google Scholar 

  • Yaari M. (1987) The dual theory of choice under risk. Econometrica 55: 95–105

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Meglena Jeleva.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Cohen, M., Etner, J. & Jeleva, M. Dynamic Decision Making when Risk Perception Depends on Past Experience. Theor Decis 64, 173–192 (2008). https://doi.org/10.1007/s11238-007-9061-3

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11238-007-9061-3

Keywords

Navigation