Abstract
This paper sets forth and offers an explanation for preferences for the form of the timing of resolution of uncertainty; namely for uncertainty to be resolved all at one time rather than sequentially. The explanation is based on a weakening of the independence axiom, in particular on the notion of disappointment aversion developed in Gul's (1991) axiomatic model of preferences. Implications of this aversion are discussed for issues in finance, intertemporal decision making under uncertainty, high stakes risky situations and consumer self-regulation. The analysis encourages a formulation of preferences over all attributes of interest to the decision maker, including psychological satisfaction.
Similar content being viewed by others
References
Ahlbrecht, Martin, and Martin Weber. (1997) ''Preference for Gradual Resolution of Uncertainty,'' Theory and Decision 43, 167–185.
Allais, Maurice. (1953).''FrComportement de l'Homme Rationnel devant le Risque: Critique des Postulats et Axioms de l'Ecole Americaine,'' Econometrica 21, 503–546.
Bakos, Yannis, and Erik Brynjolfsson. (1998).''Bundling Information Goods: Pricing, Profits and Efficiency,'' Working Paper, MIT, Sloan School of Management.
Bell, David E. (1985).''Disappointment in Decision Making Under Uncertainty,'' Operations Research 33, 1–27.
Benartzi, Shlomo, and Richard H. Thaler. (1995).''Myopic Loss Aversion and the Equity Premium Puzzle,'' Quarterly Journal of Economics 110, 75–92.
Borges, Bernhard F. J., and Jack L. Knetsch. (1998).''Tests of Market Outcomes with Asymmetric Valuations of Gains and Losses: Smaller Gains, Fewer Trades, and Less Value,'' Journal of Economic Behavior & Organization 33, 185–193.
Camerer, Colin F. (1995).''Individual Decision Maker.'' In John H. Kagel and Alvin E. Roth eds., The Handbook of Experimental Economics. Princeton, NJ: Princeton University Press.
Camerer, Colin F., and Teck-Hua Ho. (1994).''Violations of the Betweenness Axiom and Nonlinearity in Probability,'' Journal of Risk and Uncertainty 8, 167–196.
Camerer, Colin F., and Martin Weber. (1992).''Recent Developments in Modeling Preferences: Uncertainty and Ambiguity,'' Journal of Risk and Uncertainty 5, 325–370.
Chew, Soo H, and Larry G. Epstein. (1989).''The Structure of Preferences and Attitudes Towards the Timing of the Resolution of Uncertainty,'' International Economic Review 30, 103–117.
Chew, Soo H., and Joanna L. Ho. (1994).''Hope: An Empirical Study of Attitude Toward the Timing of Uncertainty Resolution,'' Journal of Risk and Uncertainty 8, 267–288.
Degeorge, Francois, Jayendu Patel, and Richard Zeckhauser. (1999).''Earnings Management to Exceed Thresholds,'' Journal of Business 72, 1–33.
Dreze, Jacques, and Franco Modigliani. (1966).''Epargne et Consommation en Avenir Aleatoire, Cahiers du Seminaire d'Econometrie, 1966.
Epstein, Larry G., and Stanley E. Zin. (1989).''Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework,'' Econometrica 57, 937–969.
Epstein, Larry G., and Stanley E. Zin. (1991).''Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis,'' Journal of Political Economy 99, 263–286.
Evans, Dorla A. (1997).''The Role of Markets in Reducing Expected Utility Violations,'' Journal of Political Economy 105, 622–636.
Gneezy, Uri, and Jan Potters (1997).''An Experiment on Risk Taking and Evaluation Periods, Quarterly Journal of Economics 112, 631–645.
Gul, Faruk. (1991).''A Theory of Disappointment Aversion,'' Econometrica 59, 667–686.
Gul, Frank, and Russell Lundholm. (1995).''Endogenous Timing and the Clustering of Agent's Decisions,'' Journal of Political Economy 103, 1039–1066.
Hadar, Josef, and William R. Russell. (1969).''Rules for Ordering Uncertain Prospects,'' American Economic Review 59, 25–34.
Harless, David W., and Colin F. Camerer. (1994).''The Predictive Utility of Generalized Expected Utility Theories,'' Econometrica 62, 1251–1289.
Kagel, John H., and Alvin E. Roth eds.. (1995). The Handbook of Experimental Economics. Princeton, NJ: Princeton University Press.
Kahneman, Daniel, and Dan Lovallo. (1993).''Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking,'' Management Science 39, 17–31.
Kahneman, Daniel, and Amos Tversky. (1979).''Prospect Theory: An Analysis of Decision Under Risk,'' Econometrica 47, 263–291.
Kocherlakota, Narayana R. (1996).''The Equity Premium: It's Still a Puzzle,'' Journal of Economic Literature 34, 42–71.
Kreps, David M., and Evan L. Porteus. (1978).''Temporal Resolution of Uncertainty and Dynamic Choice Theory,'' Econometrica 46, 185–200.
Kreps, David M., and Evan L. Porteus. (1979).''Dynamic Choice Theory and Dynamic Programming,'' Econometrica 47, 91–100.
Laibson, David. (1997).''Golden Eggs and Hyperbolic Discounting,'' Quarterly Journal of Economics 112, 443–477.
Loewenstein, George. (1987).''Anticipation and the Valuation of Delayed Consumption.'' Economic Journal 97, 666–684.
Loomes, Graham, and Robert Sugden. (1986).''Disappointment and Dynamic Consistency in Choice Under Uncertainty,'' Review of Economic Studies 53, 271–282.
Madrigal, Vicente, and Jose A. Scheinkman. (1997).''Price Crashes, Information Aggregation, and Market-Making,'' Journal of Economic Theory 75, 16–63.
Machina, Mark J. (1987).''Choice Under Uncertainty: Problems Solved and Unsolved,'' Journal of Economic Perspectives 1, 121–154.
Markowitz, Harry M. (1959). Portfolio Selection; Efficient Diversification of Investments. New York: Wiley.
Mossin, Jan. (1969).''A Note on Uncertainty and Preferences in a Temporal Context,'' American Economic Review 59, 172–174.
Myagkov, Mikhail, and Charles R. Plott.''Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments,'' American Economic Review 87, 801–828.
Philipson, Tomas J., and Richard A. Posner. (1993). Private Choices and Public Health. The AIDS Epidemic in an Economic Perspective. Cambridge MA: Harvard University Press.
Prelec, Drazen, and George Loewenstein. (1998).''The Red and Black: Mental Accounting of Savings and Debt,'' Marketing Science 17, 4–28.
Rabin, Matthew. (1997).''Risk Aversion, Diminishing Marginal Utility, and Expected-Utility Theory: A Calibration Theorem,'' Mimeo, University of California Berkeley.
Rabin, Matthew. (1998).''Psychology and Economics,'' Journal of Economic Literature 36, 11–46.
Samuelson, Paul A. (1963).''Risk and Uncertainty: A Fallacy of Large Numbers.'' Scientia 98, 108–163.
Siegel, Jeremy J., and Richard H. Thaler. (1997).''The Equity Premium Puzzle,'' Journal of Economic Perspectives 11, 191–200.
Spence, Michael, and Richard Zeckhauser. (1972).''The Effect of the Timing of Consumption Decisions and the Resolution of Lotteries on the Choice of Lotteries,'' Econometrica 40, 401–403.
Thaler, Richard H., et al. (1997).''The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test,'' Quarterly Journal of Economics 112, 647–661.
Viscusi, W. Kip. (1992). Fatal Tradeoffs. Public and Private Responsibilities for Risk. New York: Oxford University Press.
Wakker, Peter, and Amos Tversky. (1993).''An Axiomatization of Cummulative Prospect Theory,'' Journal of Risk and Uncertainty 7, 147–176.
Weil, Philippe. (1990).''Nonexpected Utility in Macroeconomics,'' Quarterly Journal of Economics 105, 29–42.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Palacios-Huerta, I. The Aversion to the Sequential Resolution of Uncertainty. Journal of Risk and Uncertainty 18, 249–269 (1999). https://doi.org/10.1023/A:1007897312164
Issue Date:
DOI: https://doi.org/10.1023/A:1007897312164