Risk Premiums for Decision Regret

Some people find decision making under uncertainty difficult because they fear making the “wrong decision,” wrong in the sense that the outcome of their chosen alternative proves to be worse than could have been achieved with another alternative. These people may be willing to pay a premium to avoid consequences that produce this decision regret. This paper continues an earlier investigation into the normative implications of decision regret and looks at situations where the joint probability distribution of consequences between alternatives is not specified at the time of the decision. It includes a discussion of cases where the outcomes produced by alternatives not chosen are never resolved. A consequence of this model of preferences for risky situations is that two components of risk aversion may be identified, decreasing marginal value and regret aversion.