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An approximate dual-self model and paradoxes of choice under risk

An approximate dual-self model and paradoxes of choice under risk
An approximate dual-self model and paradoxes of choice under risk
We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.
0167-4870
Levine, David
df39c7bf-bfdc-4f34-bbc9-7158aa0b2152
Fudenberg, Drew
87f02132-d1be-4db5-80ee-4e0d6f849111
Maniadis, Zacharias
70ffa309-94c9-487c-982f-778294ea2a13
Levine, David
df39c7bf-bfdc-4f34-bbc9-7158aa0b2152
Fudenberg, Drew
87f02132-d1be-4db5-80ee-4e0d6f849111
Maniadis, Zacharias
70ffa309-94c9-487c-982f-778294ea2a13

Levine, David, Fudenberg, Drew and Maniadis, Zacharias (2013) An approximate dual-self model and paradoxes of choice under risk. Journal of Economic Psychology. (doi:10.1016/j.joep.2013.02.007).

Record type: Article

Abstract

We derive a simplified version of the model of Fudenberg and Levine [2006, 2011] and show how this approximate model is useful in explaining choice under risk. We show that in the simple case of three outcomes, the model can generate indifference curves that “fan out” in the Marshack-Machina triangle, and thus can explain the well-known Allais and common ratio paradoxes that models such as prospect theory and regret theory are designed to capture. At the same time, our model is consistent with modern macroeconomic theory and evidence and generates predictions across a much wider set of domains than these models.

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e-pub ahead of print date: 5 March 2013
Organisations: Economics

Identifiers

Local EPrints ID: 358285
URI: https://eprints.soton.ac.uk/id/eprint/358285
ISSN: 0167-4870
PURE UUID: 5876fe47-f2d3-457d-a4fd-7666922830bd
ORCID for Zacharias Maniadis: ORCID iD orcid.org/0000-0002-3225-0835

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Date deposited: 09 Oct 2013 13:23
Last modified: 03 Dec 2019 01:38

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