Luppi, Barbara
(2003)
Experimentation and Disappointment.
Bologna:
Dipartimento di Scienze economiche DSE,
p. 21.
DOI
10.6092/unibo/amsacta/4801.
In: Quaderni - Working Paper DSE
(493).
ISSN 2282-6483.
Full text available as:
Abstract
We depart from the classic setting of bandit problems by endowing the
agent with a disappointment-elation utility function. The disutility of a
loss is assumed to be greater than the elation associated with same-size
gain, according to Kahneman-Tversky findings on the attitude of agents
towards a change in wealth. We characterise the optimal experimentation
strategy of an agent in a two-armed bandit problem setting with infinite
horizon and we derive an existence theorem, specifying a condition on the
disappointment aversion parameter. The model, solved in closed form in
a one-armed bandit setting, shows that an agent who feels disappointment
experiments more intensively than the agent characterised by the standard
expected utility model, despite disappointment, but only if the degree of
disappointment is under a certain threshold level. The threshold level
depends both on the probability of rewards along the unknown projects
relative to the expected number of trials and on the expected reward of
the unknown project.
Abstract
We depart from the classic setting of bandit problems by endowing the
agent with a disappointment-elation utility function. The disutility of a
loss is assumed to be greater than the elation associated with same-size
gain, according to Kahneman-Tversky findings on the attitude of agents
towards a change in wealth. We characterise the optimal experimentation
strategy of an agent in a two-armed bandit problem setting with infinite
horizon and we derive an existence theorem, specifying a condition on the
disappointment aversion parameter. The model, solved in closed form in
a one-armed bandit setting, shows that an agent who feels disappointment
experiments more intensively than the agent characterised by the standard
expected utility model, despite disappointment, but only if the degree of
disappointment is under a certain threshold level. The threshold level
depends both on the probability of rewards along the unknown projects
relative to the expected number of trials and on the expected reward of
the unknown project.
Document type
Monograph
(Working Paper)
Creators
Keywords
two and one-armed bandit, disappointment, learning
Subjects
ISSN
2282-6483
DOI
Deposit date
09 Mar 2016 15:08
Last modified
09 Mar 2016 15:08
URI
Other metadata
Document type
Monograph
(Working Paper)
Creators
Keywords
two and one-armed bandit, disappointment, learning
Subjects
ISSN
2282-6483
DOI
Deposit date
09 Mar 2016 15:08
Last modified
09 Mar 2016 15:08
URI
Downloads
Downloads
Staff only: