TEC (Theory) Seminar: Matthew Rabin, Harvard

Speaker

Matthew Rabin, Harvard

Title

"Risky Living"

Abstract

Building from an updated version of the model in Koszegi and Rabin (2009), we consider how news utility and loss aversion influence repeat purchases of drugs, as well as purchases of durable goods. The emphasis is on the dynamics of risk attitudes towards day-to-day consumption uncertainties rather than attitudes towards unexpected, one-shot money gambles. We show that, fixing the intrinsic consumption utility for the consumer, loss aversion predicts a greater taste (1) for purchasing and insuring a meliorative drug than a recreational drug, and (2) for purchasing a durable good that can be re-purchased when it breaks, and that doesn't generate random foreboding over when it may break.