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Monday, August 2 • 2:15pm - 3:45pm
2D3 A Model of Anchoring and Adjustment for Decision-Making under Risk

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Johannes Jaspersen, Ludwig-Maximilians-Universität München; Marc Ragin, University of Georgia

We introduce a simple model of anchoring and adjustment for decision-making under risk. The model can be applied to both discrete and continuous lotteries and in the discrete case leads to behavior that is observationally equivalent to expected utility maximization with probability weighting. The resulting decision model is conceptually similar to prospect theory, but differs from the established models in key aspects. We apply the anchoring model to several choice anomalies commonly observed in decisions under risk and show that it can explain both Allais paradoxes, the St. Petersburg paradox, event-splitting effects and the effect of probability in the fourfold pattern of risk attitudes. We also apply the model to equity premiums and show that in combination with a myopic evaluation process, it implies higher equity premiums than expected utility theory, especially when equity returns are negatively skewed. Using historical data on asset returns, we show that the model can solve the equity premium puzzle for reasonable combinations of preference parameters.

Discussant
TB

Tim Boonen

University of Amsterdam

Presenters
JJ

Johannes Jaspersen

Ludwig-Maximilians-Universität München
avatar for Marc Ragin

Marc Ragin

University of Georgia



Monday August 2, 2021 2:15pm - 3:45pm EDT