title: Reference-dependent risk sensitivity as rational inference.
abstract: Existing explanations of reference-dependent risk sensitivity attribute it to cognitive imperfections and heuristic choice processes. This article shows that behavior consistent with an S-shaped value function could be an implication of rational inferences about the expected values of alternatives. Theoretically, I demonstrate that even a risk-neutral Bayesian decision maker, who is uncertain about the reliability of observations, should use variability in observed outcomes as a predictor of low expected value for outcomes above a reference level, and as a predictor of high expected value for outcomes below a reference level. Empirically, I show that combining past outcomes using an S-shaped value function leads to accurate predictions about future values. The theory also offers a rationale for why risk sensitivity consistent with an inverse S-shaped value function should occur in experiments on decisions from experience with binary payoff distributions.
authors.affiliation: University of Warwick.
authors.forename: Jerker C
authors.initials: JC
authors.lastname: Denrell
mesh_terms: D003657:Decision Making / Q000502:physiology*; D006801:Humans; D015233:Models, Statistical; D011582:Psychological Theory; D012309:Risk-Taking