Economic Theory
October 2020
We report on an experiment that shows subjects prefer a gradual resolution of uncertainty when information about winning yields decisive bad news but inconclusive good news. This behavior is difficult to reconcile with existing theories of choice under uncertainty, including the Kreps-Porteus model. We show how the behavioral patterns uncovered by our experiment can be understood as arising from subjects’ special emphasis on their best (peak) and worst (trough) experiences along the realized path of uncertainty.
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