Endogenous Risk Attitudes

45 Pages Posted: 14 Jul 2021

See all articles by Jakub Steiner

Jakub Steiner

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Nick Netzer

University of Zurich

Arthur Robson

Simon Fraser University (SFU)

Pavel Kocourek

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: May 1, 2021

Abstract

In a model inspired by neuroscience, we show that constrained optimal perception encodes lottery rewards using an S-shaped encoding function and over-samples low-probability events. The implications of this perception strategy for behavior depend on the decision-maker's understanding of the risk. The strategy does not distort choice in the limit as perception frictions vanish when the decision-maker fully understands the decision problem. If, however, the decision-maker underrates the complexity of the decision problem, then risk attitudes reflect properties of the perception strategy even for vanishing perception frictions. The model explains adaptive risk attitudes and probability weighting as in prospect theory and, additionally, predicts that risk attitudes are strengthened by time pressure and attenuated by anticipation of large risks.

JEL Classification: D81, D87, D91

Suggested Citation

Steiner, Jakub and Netzer, Nick and Robson, Arthur and Kocourek, Pavel, Endogenous Risk Attitudes (May 1, 2021). CEPR Discussion Paper No. DP16190, Available at SSRN: https://ssrn.com/abstract=3886630

Jakub Steiner

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
+420 605 286 947 (Phone)

HOME PAGE: http://www.cerge-ei.cz

Nick Netzer

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Arthur Robson

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Pavel Kocourek (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

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