Risk-Pooling Arrangements Involving Individuals Feeling Regret or Rejoicing

Abstract This study examines how feelings of regret and rejoicing affect participation in risk-pooling arrangements. The main finding reveals that whether feelings of regret and rejoicing have positive or negative effects on participation in a risk-pooling arrangement depends on the forms of utility, regret, and rejoicing functions and the magnitude of accident probability. In a common situation in which the utility and rejoicing functions are strictly concave, the regret function is strictly convex, the magnitude of the accident probability is small, feeling regret promotes participation in a risk-pooling arrangement, whereas rejoicing might hinder participation. Hence, individuals who experience rejoicing do not participate in a risk-pooling arrangement when the degree of concavity of the rejoicing function is large, whereas individuals who do not experience rejoicing always choose to participate.