Aversion to risk of regret and preference for positively skewed risks

Gollier, Christian (2018) Aversion to risk of regret and preference for positively skewed risks. Economic Theory. (In Press)

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Official URL: http://tse-fr.eu/pub/32932

Abstract

We assume that the ex-post utility of an agent facing a menu of lotteries depends upon the actual payoff together with its forgone best alternative, thereby allowing for the expost emotion of regret. An increase in the risk of regret is obtained when the actual payoff and its forgone best alternative are statistically less concordant in the sense of Tchen (1980). The aversion to any such risk of regret is thus equivalent to the supermodularity of the bivariate utility function. We show that more regret-risk-averse agents are more willing to choose the risky act in a one-risky-one-safe menu, in particular when the payoff of the risky choice is highly skewed. This is compatible with the "possibility effect" that is well documented in prospect theory. Symmetrically, we define the aversion to elationrisk that can prevail when the ex-post utility is alternatively sensitive to the forgone worst payoff. We show that elation-risk-seeking is compatible with the "certainty effect". We finally show that regret-risk-averse and elation-risk-seeking people behave as if they had rank-dependent utility preferences with an inverse-S shaped probability weighting function that reproduces estimates existing in the literature.

Item Type: Article
Language: English
Date: 2018
Refereed: Yes
Uncontrolled Keywords: Longshot bias, certainty effect, possibility effect, probability weighting, riskseeking, prospect theory, behavioral finance
JEL codes: D81 - Criteria for Decision-Making under Risk and Uncertainty
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 12 Sep 2018 13:14
Last Modified: 12 Sep 2018 13:14
OAI ID: oai:tse-fr.eu:32932
URI: http://publications.ut-capitole.fr/id/eprint/26245

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