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Reference-dependent risk sensitivity as rational inference
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Denrell, Jerker (2015) Reference-dependent risk sensitivity as rational inference. Psychological Review, 122 (3). pp. 461-484. doi:10.1037/a0039250 ISSN 0033-295X.
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Official URL: http://dx.doi.org/10.1037/a0039250
Abstract
Existing explanations of reference-dependent risk sensitivity attribute it to cognitive imperfections and heuristic choice processes. This article shows that behavior consistent with an S-shaped value function could be an implication of rational inferences about the expected values of alternatives. Theoretically, I demonstrate that even a risk-neutral Bayesian decision maker, who is uncertain about the reliability of observations, should use variability in observed outcomes as a predictor of low expected value for outcomes above a reference level, and as a predictor of high expected value for outcomes below a reference level. Empirically, I show that combining past outcomes using an S-shaped value function leads to accurate predictions about future values. The theory also offers a rationale for why risk sensitivity consistent with an inverse S-shaped value function should occur in experiments on decisions from experience with binary payoff distributions.
Item Type: | Journal Article | ||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||
Journal or Publication Title: | Psychological Review | ||||||
Publisher: | American Psychological Association | ||||||
ISSN: | 0033-295X | ||||||
Official Date: | July 2015 | ||||||
Dates: |
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Volume: | 122 | ||||||
Number: | 3 | ||||||
Page Range: | pp. 461-484 | ||||||
DOI: | 10.1037/a0039250 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Restricted or Subscription Access |
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