Theory
Disappointment theory, pioneered in the mid-1980s by David E. Bell with further development by Graham Loomes and Robert Sugden, revolves around the notion that people contemplating risks are disappointed when the outcome of the risk is not evaluated as positively as the expected outcome. Disappointment theory has been utilized in examining such diverse decision-making processes as return migration, taxpayer compliance and customer willingness to pay. David Gill and Victoria Prowse provide experimental evidence that people are disappointment averse when they compete.
Disappointed individuals focus on "upward counterfactuals"—alternative outcomes that would have been better than the one actually experienced—to the point that even positive outcomes may result in disappointment. One example, supplied by Bell, concerns a lottery win of $10,000.00, an event which will theoretically be perceived more positively if that amount represents the highest possible win in the lottery than if it represents the lowest. Decision analysts operate on the assumption that individuals will anticipate the potential for disappointment and make decisions that are less likely to lead to the experience of this feeling. Disappointment aversion has been posited as one explanation for the Allais paradox, a problematic response in expected utility theory wherein people prove more likely to choose a sure reward than to risk a higher one while at the same time being willing to attempt a greater reward with lower probability when both options include some risk.
While earlier developers of disappointment theory focused on anticipated outcomes, more recent examinations by Philippe Delquié and Alessandra Cillo of INSEAD have focused on the impact of later disappointment resulting when an actual outcome comes to be regarded negatively based on further development; for example, if a person receives higher than expected gains in the stock market, she may be elated until she discovers a week later that she could have gained much more profit if she had waited a few more days to sell. This experience of disappointment may influence subsequent behavior, and, the analysts state, an incorporation of such variables into disappointment theory may enhance the study of behavioral finance. Disappointment is, along with regret, measured by direct questioning of respondents.
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