Disappointment in Decision Making Under Uncertainty

TLDR

Decision analysis assumes equal utility for equally desirable outcomes, yet financial decisions often treat identical dollar amounts as equally preferred, ignoring that winning a top prize can elicit greater happiness than the same amount as a low prize. The study investigates how disappointment—comparing lottery outcomes to expectations—affects decision making under uncertainty. The authors incorporate disappointment into utility theory through a prescriptive model. Recognizing that decision makers pay a premium to avoid disappointment explains certain behavioral paradoxes and indicates sensitivity to how lotteries are resolved.

Abstract

Decision analysis requires that two equally desirable consequences should have the same utility and vice versa. Most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred However, winning the top prize of $10,000 in a lottery may leave one much happier than receiving $10,000 as the lowest prize in a lottery. This paper explores the implications of disappointment, a psychological reaction caused by comparing the actual outcome of a lottery to one's prior expectations, for decision making under uncertainty. Explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes, and suggests that decision makers may be sensitive to the manner in which a lottery is resolved. The concept of disappointment is integrated into utility theory in a prescriptive model.