A decision‐making model with utility from anticipation and disappointment

Abstract

We propose a descriptive model to capture the trade-off between anticipation and either elation or disappointment subject to an optimism/pessimism bias in decision making. In our model, there are two periods of the decision-making process. In the first period, the decision maker (DM) anticipates receiving the future pay-offs with subjective probabilities for the lottery outcomes that may deviate from the objective probabilities for these pay-offs. In the second period, the DM evaluates the lottery outcomes on the basis of the objective probabilities but compares the received outcome with a level of anticipation formed in the first period. The DM will experience elation or disappointment when this outcome is above or below her or his level of anticipation, respectively. We provide an axiomatic framework for our model. Finally, we also show that the model allows risk attitudes that cannot be accommodated by existing models and has implications in portfolio selection and asset pricing problems in finance. KEYWORDSanticipation and disappointment/elation, decision making, gambling, optimism and pessimism bias, portfolio selection, risk attitude

An economic decision-making model of anticipated surprise with dynamic expectation

“…Several recent models use concepts related to the general notion of 'expectation' as reference points in their construction. These expectations can either be determined by subjective analysis of the context of the problem (He et al, 2019;Kőszegi & Rabin, 2006, 2007 or by objective measures, e.g. one or more outcomes in a problem (Bleichrodt & Wakker, 2015;Loomes & Sugden, 1982) or statistics derived from them (Ok, Ortoleva, & Riella, 2015).…”

“…Many decision-making models explain people's choices by applying different concepts of 'anticipation', e.g. by considering the anticipated regret for not choosing other options (Bleichrodt & Wakker, 2015;Loomes & Sugden, 1982); by using the accumulation of anticipated elation (Iigaya et al, 2020;Loewenstein, 1987); and by analyzing the possible outcomes a subject anticipate to get (He et al, 2019;Kőszegi & Rabin, 2006, 2007. Indeed, when animals are planning an action, neurons in the brain exhibit activities that resemble possible task-state sequences (Ólafsdóttir, Bush, & Barry, 2018).…”

“…Another subjective element revolves around the structure of a decision-making problem, as many models employ various restructuring techniques to morph a problem into alternative forms in order to explain the empirical behaviors, e.g. by applying editing rules (Kahneman & Tversky, 1979) and by dividing the decision-making process into multiple evaluation stages that deal with separate aspects of the problems (He, Dyer, & Butler, 2019). Nevertheless, ambiguity often arises in their implementation of such restructuring processes.…”

How rational is gambling?

“…Most papers referring to non‐financial motivations, however, suggest that gambling might simply generate some consumption benefits (see Eadington, 1999), for example, it might just be fun. For example, gamblers may derive direct utility from the act of anticipating elation after winning (see e.g., He et al., 2019b; Loewenstein, 1987). The act of playing for example, a lottery thus might carry a utility value in its own and part of that utility is already consumed before the draw (see Burger et al., 2020).…”

Surroundings: History-Dependent Optimization and Applications to Circular and Sustainable Economics

“…In Economics, history dependencies have mainly appeared in models with a representative consumer taking her own past consumptions as a reference point. Axiomatically (Rozen[44], Rustichini and Siconolfi [45,46], He Dyer Butler [24], etc), theoretically (Ryder and Heal [25], Caroll, Overland and Weil [11], Bambi and Gozzi [6], Bambi, Ghilli, Gozzi and Leocata [5], etc) and empiricallly (Havranek, Rusnak and Sokolova [22], Fuhrer [18], Ravina [42], Dynan [15], etc .....), different viewpoints have contributed to explain some observed phenomena. In this literature, a current history level is introduced and several ways of history formation from consumptions have been considered.…”