A decision-making model with utility from anticipation and disappointment

We propose a descriptive model to capture the trade-off between anticipation and either elation or disappointment subject to an optimism/pessimism bias in decision making. In our model, there are two periods of the decision-making process. In the first period, the decision maker (DM) anticipates receiving the future pay-offs with subjective probabilities for the lottery outcomes that may deviate from the objective probabilities for these pay-offs. In the second period, the DM evaluates the lottery outcomes on the basis of the objective probabilities but compares the received outcome with a level of anticipation formed in the first period. The DM will experience elation or disappointment when this outcome is above or below her or his level of anticipation, respectively. We provide an axiomatic framework for our model. Finally, we also show that the model allows risk attitudes that cannot be accommodated by existing models and has implications in portfolio selection and asset pricing problems in finance.