Title: Job Market Paper Mistake Aversion and a Theory of Robust Decision Making
Abstract: This paper studies the behavioral trait of aversion to making mistakes. I use the framework of subjective uncertainty to develop a choice procedure that captures mistake aversion along the lines of robust decision making: For each probability distribution (prior) that may plausibly describe the underlying uncertainty, the decision maker computes his expected utility and discards the feasible choice options that cannot guarantee a particular level of utility relative to an exogenously given default option. The paper then follows the revealed preference approach to study the behavioral foundations of this procedure and the comparative notion of mistake aversion. In an application to finance, I show that mistake aversion leads to an increase of the risk premia. The effects of the volatility of payoffs on asset prices/returns are also found to be potentially different than in the predictions of the standard expected utility theory and the maxmin model of ambiguity aversion.
Publication Year: 2013
Publication Date: 2013-01-01
Language: en
Type: article
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Cited By Count: 1
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