The Knowledge Ahead Approach to Risk

Abstract

This book is written for those seeking a decision theory appropriate for use in serious choices such as insurance. It employs stages of knowledge ahead to track satisfactions and dissatisfactions. In the first stage of risk, the uninsured face dissatisfactions of worries and planning difficulties (avoided by the insured), also perhaps positive satisfactions of thrills (missed out on by the insured). In the second stage when the risk is passed the uninsured may face the dissatisfactions of ridicule and blame if they learn that they were unlucky. From experimental and questionnaire data, people take into account such stages of knowledge ahead satisfactions and dissatisfactions. This means we must go beyond standard decision theories like expected utility or cumulative prospect theory which are irrationally atemporal (single stage) theories, ignoring the initial risky stage to be endured or enjoyed before learning whether one has been lucky or unlucky.