Abstract
To study intertemporal decisions under risk, we develop a new recursive model of non-expected-utility
preferences. The main axiom of our analysis is called mixture aversion, as it captures
a dislike of probabilistic mixtures of lotteries. Our representation for mixture-averse
preferences can be interpreted as if an individual optimally selects her risk attitude
from some feasible set. The representation includes special cases where the choice
of risk attitude takes the form of an optimal selection of a reference point. We analyze
the implications of the model for both insurance and investment decisions. The main
application of the paper shows that mixture-averse preferences can generate endogenous
heterogeneity in equilibrium stock market participation, even when consumers have
identical preferences and even among wealthy households.
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