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Disappointment and Dynamic Consistency in Choice under Uncertainty

Graham Loomes and Robert Sugden
The Review of Economic Studies
Vol. 53, No. 2 (Apr., 1986), pp. 271-282
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2297651
Page Count: 12
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Disappointment and Dynamic Consistency in Choice under Uncertainty
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Abstract

The central proposition of disappointment theory is that an individual forms expectations about uncertain prospects, and that if the actual consequence turns out to be worse than (or better than) that expectation, the individual experiences a sensation of disappointment (or elation) generating a decrement (or increment) of utility which modifies the basic utility derived from the consequence. By incorporating a simple disappointment-elation function into a model of individual choice, many observed violations of conventional expected utility axioms--including violations of Savage's sure-thing principle and the "isolation effect"--can be predicted and defended as rational and dynamically consistent behaviour.

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