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Title: Hierarchies and the self-control of risk attitude
Authors: Wathieu, Luc
Keywords: Information decentralization
Reference points
Dynamic choice under risk
Decision making
Issue Date: Dec-1994
Series/Report no.: Marketing Working Paper Series ; MKTG 95.031
Abstract: In hierarchies, top members are not continuously informed about the intermediary outcomes of their policies. This feature of organizational decision making is often regarded as a drawback caused by communication costs. On the contrary, we argue that such information decentralization creates a valuable interface between a decision maker and his environment. We assume a reference-dependent utility function à la Kahneman and Tversky. Personal contact with an intermediary outcome provokes a shift of reference point, and thereby a change of attitude towards the forthcoming alternative risks. Information decentralization stabilizes the reference point. We characterize classes of dynamic choice situations where this effect should prove desirable. Then, we show that hierarchical systems can help decision makers overcome their personal conservative tendencies.
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