The Effect of Disappointment Aversion on Risk Prevention

ABSTRACT We adopt three of well‐established models of disappointment aversion to study the effect of disappointment aversion on risk prevention which involves self‐insurance and self‐protection. In self‐insurance actions, we show that, in general, the disappointment‐averse decision maker will exert more effort than the standard risk‐averse decision maker, and the optimal efforts across these disappointment models are not identical. Moreover, under the Gul model , the disappointment‐averse decision maker may exert less effort than the standard risk‐averse decision maker in multiple loss states. In self‐protection actions, we provide a set of sufficient conditions under which the disappointment‐averse decision maker will exert more effort or less effort compared with the standard risk‐averse decision maker for each of these disappointment aversion models.