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Dynamic Mixture-Averse Preferences

Publication ,  Journal Article
Sarver, T
Published in: Econometrica
January 1, 2018

To study intertemporal decisions under risk, we develop a new recursive model of non-expected-utility preferences. The main axiom of our analysis is called mixture aversion, as it captures a dislike of probabilistic mixtures of lotteries. Our representation for mixture-averse preferences can be interpreted as if an individual optimally selects her risk attitude from some feasible set. We describe some useful parametric examples of our representation and provide comparative statics that tightly link decreases in risk aversion to larger sets of feasible risk attitudes. We then present several applications of the model. In an insurance problem, mixture-averse preferences can produce a marginal willingness to pay for insurance coverage that increases in the level of existing coverage. In investment decisions, our model can generate endogenous heterogeneity in equilibrium stock market participation, even when consumers have identical preferences. Finally, we demonstrate that our model can address the Rabin paradox even in the presence of reasonable levels of background risk.

Duke Scholars

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Published In

Econometrica

DOI

EISSN

1468-0262

ISSN

0012-9682

Publication Date

January 1, 2018

Volume

86

Issue

4

Start / End Page

1347 / 1382

Related Subject Headings

  • Econometrics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 1401 Economic Theory
 

Citation

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Sarver, T. (2018). Dynamic Mixture-Averse Preferences. Econometrica, 86(4), 1347–1382. https://doi.org/10.3982/ECTA12687
Sarver, T. “Dynamic Mixture-Averse Preferences.” Econometrica 86, no. 4 (January 1, 2018): 1347–82. https://doi.org/10.3982/ECTA12687.
Sarver T. Dynamic Mixture-Averse Preferences. Econometrica. 2018 Jan 1;86(4):1347–82.
Sarver, T. “Dynamic Mixture-Averse Preferences.” Econometrica, vol. 86, no. 4, Jan. 2018, pp. 1347–82. Scopus, doi:10.3982/ECTA12687.
Sarver T. Dynamic Mixture-Averse Preferences. Econometrica. 2018 Jan 1;86(4):1347–1382.
Journal cover image

Published In

Econometrica

DOI

EISSN

1468-0262

ISSN

0012-9682

Publication Date

January 1, 2018

Volume

86

Issue

4

Start / End Page

1347 / 1382

Related Subject Headings

  • Econometrics
  • 3803 Economic theory
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 1401 Economic Theory