Gollier, Christian (2016) Aversion to risk of regret and preference for positively skewed risks. TSE Working Paper, n. 16-646, Toulouse

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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: Monograph (Working Paper)
Language: English
Date: May 2016
Place of Publication: Toulouse
Uncontrolled Keywords: Longshot bias, certainty effect, possibility effect, probability weighting, riskseeking, prospect theory, behavioral finance
JEL Classification: D81 - Criteria for Decision-Making under Risk and Uncertainty
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 31 May 2016 12:59
Last Modified: 18 Apr 2024 11:55
OAI Identifier: oai:tse-fr.eu:30471
URI: https://publications.ut-capitole.fr/id/eprint/21962

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