Adaptive risk assessments
Adaptive risk assessments
We model a decision maker who can exert costly effort to adapt her risk assessments, thereby optimizing the value of her risky prospects. We provide an axiomatic characterization of the model and show how costs of adaption can be elicited and compared across individuals. In a moral hazard problem, we show that adapting risk assessments can weaken the effect of monetary incentives for effort provision, which has important implications for agency problems. We provide several examples to illustrate how adapting risk assessments can rationalize many well-known choice anomalies.
adapting risk assessments, Allais paradoxes, backfiring monetary incentives, choice anomalies, desire for basic lottery, moral hazard
Ozbek, Kemal
e7edfcf5-cb17-4e64-bfa4-30fb527d2e46
May 2023
Ozbek, Kemal
e7edfcf5-cb17-4e64-bfa4-30fb527d2e46
Abstract
We model a decision maker who can exert costly effort to adapt her risk assessments, thereby optimizing the value of her risky prospects. We provide an axiomatic characterization of the model and show how costs of adaption can be elicited and compared across individuals. In a moral hazard problem, we show that adapting risk assessments can weaken the effect of monetary incentives for effort provision, which has important implications for agency problems. We provide several examples to illustrate how adapting risk assessments can rationalize many well-known choice anomalies.
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Accepted/In Press date: 30 March 2023
e-pub ahead of print date: 5 April 2023
Published date: May 2023
Keywords:
adapting risk assessments, Allais paradoxes, backfiring monetary incentives, choice anomalies, desire for basic lottery, moral hazard
Identifiers
Local EPrints ID: 476737
URI: http://eprints.soton.ac.uk/id/eprint/476737
ISSN: 0304-4068
PURE UUID: 62430317-9f16-482f-8066-d37c713d0f79
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Date deposited: 12 May 2023 16:59
Last modified: 17 Mar 2024 03:59
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