Andrei Savochkin
18 November 2013 @ 12:45 - 13:45
- Past event
“Mistake Aversion and a Theory of Robust Decision Making”
Abstract
This paper studies the behavioral trait of aversion to making mistakes in the framework of choice under subjective uncertainty, assuming that the probabilities of outcomes are not exogenously specified. The decision procedure that is proposed to capture mistake aversion follows the general approach of robust decision making: For each probability distribution that may plausibly describe the uncertainty, the decision maker computes his expected utility, and discards the feasible choice options that cannot guarantee a particular level of utility relative to his default option. The paper then follows the revealed preferences approach to study foundations of this procedure and the comparative notion of mistake aversion. As shown in an application, the proposed model is capable of generating higher risk premia and the effects of the volatility of payoffs on asset prices and returns that are different than in the standard models.