Dynamic Decision Making when Risk Perception Depends on Past Experience

Michèle Cohen (1) , Johanna Etner (1, 2) , Meglena Jeleva (1, 3)

1 CES - Centre d'économie de la Sorbonne
2 LIRAES - EA 4470 - Laboratoire Interdisciplinaire de Recherche Appliquée en Economie de la Santé
3 GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux

The aim of the paper is to propose a preferences representation model under risk where risk perception can be past experience dependent. A first step consists in considering a one period decision problem where individual preferences are no more defined only on decisions but on pairs (decision, past experience). The obtained criterion is used in the construction of a dynamic choice model under risk. The paper ends with an illustrative example concerning insurance demand. It
appears that our model allows to explain modifications in the insurance demand behavior over time observed on the insurance markets for catastrophic risk and difficult to justify with standard models.

Mots clés: dynamic decision making; past experience; rank dependent utility model; recursive model; risk perception

Domaines: Economies et finances

Michèle Cohen, Johanna Etner, Meglena Jeleva. Dynamic Decision Making when Risk Perception Depends on Past Experience. Theory and Decision, 2008, 64 (2-3), pp.173-192. ⟨10.1007/s11238-007-9061-3⟩. ⟨halshs-00211942⟩