Prescriptive models of pyschological effects on risk attitudes

This paper discusses models of a person’s risk attitude toward financial changes when his preferences depend on psychological effects of the changes, for example, effects on how the person is judged by himself and by others. These models represent the risk attitude of a person who due to these effects is risk averse for outcomes involving gains or the status quo but is risk prone for outcomes involving losses or the status quo. The models are prescriptive in that they exclude the heuristic biases that are studied in behavioral decision theory. They are examined from the descriptive, prescriptive, and normative perspectives. In particular, they are shown to satisfy the principles of expected utility but to violate several other normative principles.