Firms may produce less than expected due to disappointment aversion.
The article explores how firms make production decisions when they are not only afraid of risks but also disappointed by outcomes. They use different models to see when a disappointment-averse firm will produce less than a risk-averse one. The study finds that a disappointment-averse firm will decrease production if the chance of bad outcomes increases. This means that even if prices are expected to rise, the firm might still produce less due to fear of disappointment. The research also shows that the marginal rates of substitution for all disappointment-averse models are equal to the slope of the isoprofit line.