When Choosing is Painful: A Psychological Opportunity Cost Model

Abstract

This paper is a contribution to regret theory, which we generalize in two ways. Since the intensity of regret depends on the information the decision-maker has about the results of the foregone strategies, we build a model of choice which accommodates any feedback structure. We also show that the reference point, which characterizes the regret utility function introduced by Quiggin (1994), does not always represent a feeling of regret. It corresponds to a broader concept, which we call psychological opportunity cost (POC), of which regret is no more than a specific expression. We find behavioral deviations from the predictions of the classical Expected Utility Theory. We obtain correlation loving, greater reluctance to take on risk and information avoidance at decision time. Our model equally offers a theoretical framework for experimental studies about inaction inertia.

Keywords: Choice, correlation loving, inaction inertia, information, regret, risk aversion

JEL Classification: D80, D81, D91