Imperfect Memory and Choice under Risk1

Abstract

This paper proposes a model of choice under risk based on imperfect memory and self-deception. The model assumes that people have preferences over their own attributes and can, to some extent, manipulate their memories. It leads to a non-expected utility representation and provides a uni…ed explanation for several empirical regularities: non-linear probability weights, small-stakes risk aversion, regret, and the competence hypothesis. It also leads to endowment and sunk cost e¤ects. The model implies that behavior will converge to the one predicted by expected utility theory after a choice has been made a su¢ ciently large number of times.

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Cite this paper

@inproceedings{Gottlieb2008ImperfectMA, title={Imperfect Memory and Choice under Risk1}, author={Daniel Gottlieb and Eduardo M. Azevedo and Abhijit Banerjee and Roland B{\'e}nabou and Moshe Cohen}, year={2008} }