I am grateful to Faruk Gul and Wolfgang Pesendorfer for their invaluable advice during the development of the paper. I thank Roland Benabou, Eric Maskin, Stephen Morris, Klaus Nehring, and Uzi Segal for their helpful discussions and comments. The co-editor and four anonymous referees provided valuable comments that improved the paper significantly. I have also benefited from suggestions made by Shiri Artstein-Avidan, Amir Bennatan, Bo'az Klartag, Ehud Lehrer, George Mailath, Charles Roddie, and Kareen Rozen. Special thanks to Anne-Marie Alexander for all her help. This paper is based on the first chapter of my doctoral dissertation at Princeton University.
Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior
Article first published online: 3 DEC 2010
© 2010 The Econometric Society
Volume 78, Issue 6, pages 1973–2004, November 2010
How to Cite
Dillenberger, D. (2010), Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior. Econometrica, 78: 1973–2004. doi: 10.3982/ECTA8219
- Issue published online: 3 DEC 2010
- Article first published online: 3 DEC 2010
- Manuscript received October, 2008; final revision received April, 2010.
- Recursive preferences over compound lotteries;
- resolution of uncertainty;
- Allais paradox;
- negative certainty independence
Experimental evidence suggests that individuals are more risk averse when they perceive risk that is gradually resolved over time. We address these findings by studying a decision maker who has recursive, nonexpected utility preferences over compound lotteries. The decision maker has preferences for one-shot resolution of uncertainty if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic preferences for one-shot resolution of uncertainty and static preferences that are identified with commonly observed behavior in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium.