The Effect of Disappointment Aversion on Risk Prevention

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.