Utility Models and Prospect Theory
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Utility Models and Prospect Theory
2017-09-17
Welfare effects of information and rationality in portfolio decisions under parameter uncertainty
http://d.repec.org/n?u=RePEc:arx:papers:1709.04387&r=upt
We analyze and quantify, in a financial market with parameter uncertainty and for a Constant Relative Risk Aversion investor, the utility effects of two different boundedly rational (i.e., sub-optimal) investment strategies (namely, myopic and unconditional strategies) and compare them between each other and with the utility effect of full information. We show that effects are mainly caused by full information and predictability, being the effect of learning marginal. We also investigate the saver's decision of whether to manage her/his portfolio personally (DIY investor) or hire, against the payment of a management fee, a professional investor and find that delegation is mainly motivated by the belief that professional advisors are, depending on investment horizon and risk aversion, either better informed ("insiders") or more capable of gathering and processing information rather than their ability of learning from financial data. In particular, for very short investment horizons, delegation is primarily, if not exclusively, motivated by the beliefs that professional investors are better informed.
Michele Longo
Alessandra Mainini
2017-09
Rationally Biased Learning
http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01581982&r=upt
Are human perception and decision biases grounded in a form of rationality? You return to your camp after hunting or gathering. You see the grass moving. You do not know the probability that a snake is in the grass. Should you cross the grass — at the risk of being bitten by a snake — or make a long, hence costly, detour? Based on this storyline, we consider a rational decision maker maximizing expected discounted utility with learning. We show that his optimal behavior displays three biases: status quo, salience, overestimation of small probabilities. Biases can be the product of rational behavior.
Michel De Lara
status quo bias, salience bias, overestimation of small probabilities, optimal behavior
2017-09-05
Defaults, Normative Anchors and the Occurrence of Risky and Cautious Shifts
http://d.repec.org/n?u=RePEc:tin:wpaper:20170083&r=upt
Choice shifts occur when individuals advocate a risky (safe) decision when acting as part of a group even though they prefer a safe (risky) decision when acting as individuals. Even though research in psychology and economics has produced a mass of evidence on this puzzling phenomenon, there is no agreement about which mechanism produces choice shifts. In an experiment, we investigate the performance of two prominent mechanisms that have been proposed to explain the phenomenon; (i) rank-dependent utility and (ii) a desire to conform to the wishes of the majority. The evidence provides clear support for the conformity explanation.
Stephan Jagau
Theo (T.J.S.) Offerman
risky shift; cautious shift; conformity; diffusion of responsibility; rank-dependent utility
2017-09-06
Economic rationality under cognitive load
http://d.repec.org/n?u=RePEc:aua:wpaper:2017-2&r=upt
Economic analysis assumes that consumer behavior can be rationalized by a utility function. Previous research has shown that some decision-making quality can be captured by permanent cognitive ability but has not examined how a temporary load in subjects' working memory can a ect economic rationality. In a controlled laboratory experiment, we exogenously vary cognitive load by asking subjects to memorize a number while they undertake an induced budget allocation task (Choi et al., 2007a,b). Using a number of manipulation checks, we verify that cognitive load has adverse a ects on subjects' performance in reasoning tasks. However, we nd no e ect in any of the goodness-of- t measures that measure consistency of subjects' choices with the Generalized Axiom of Revealed Preferences (GARP), despite having a sample size large enough to detect even small di erences between treatments with 80% power. Our nding suggests that researchers need not worry about economic rationality breaking down when subjects are placed under temporary working memory load.
Andreas Drichoutis
Rodolfo M. Nayga, Jr.
Cognitive load, rationality, revealed preferences, working memory, response times, laboratory experiment
2017
Ambiguity and the Centipede Game: Strategic Uncertainty in Multi-Stage Games
http://d.repec.org/n?u=RePEc:awi:wpaper:0638&r=upt
We propose a solution concept for a class of extensive form games with ambiguity. Specifically we consider multi-stage games. Players have CEU preferences. The associated ambiguous beliefs are revised by Generalized Bayesian Updating. We assume individuals take account of possible changes in their preferences by using consistent planning. We show that if there is ambiguity in the centipede game it is possible to sustain 'cooperation' for many periods as part of a consistent-planning equilibrium under ambiguity. In a non-cooperative bargaining game we show that ambiguity may be a cause of delay in bargaining.
Eichberger, Jürgen
Grant, Simon
Kelsey, David
2017-09-11
Should the Interest Rate Really Be the Unique Motive to Save in the Ramsey Model?
http://d.repec.org/n?u=RePEc:hal:journl:hal-01406690&r=upt
By assuming that the individual derives utility from consumption only, the resulting optimal decision to save in the Ramsey model depends on the rate of return, given a certain time preference. If therefore the production function is such that this rate of return remains relatively low, the individual reacts unconsciously by refusing to save despite the capital depreciates and the household grows. We argue that it is conceptually necessary in that framework to assume a direct preference for saving (or for thriftiness) in the utility function, not only to make the individual behave as a real human being who cares about the survival of the household, but also to account reasonably for any other motives to save or accumulate than the rate of return. We show it generalizes the model in a way to recover static properties of the exogenous Solow version and to extend results of capitalist spirit models following Zou (1994).
Atef Khelifi
bequest,status,thriftiness,capitalist spirit,ramsey model
2016-12-01
The domestic welfare loss of Syrian Civil War: An equivalent income approach
http://d.repec.org/n?u=RePEc:hal:psewpa:hal-01581896&r=upt
This paper uses an equivalent income approach to quantify the domestic welfare loss due to the Syrian Civil War. Focusing on the (income, life expectancy) space, we show that the equivalent income has fallen by about 60 % in comparison to the pre-conflict level. We also find that the differential between the equivalent income and the standard income for 2016 lies between $75 and $144. Although this low willingness to pay for coming back to pre-conflict survival conditions can be explained by extreme poverty due to the War, the small gap between standard and equivalent incomes tends to question the extra value brought by the latter for the measurement of standards of living in situations of severe poverty. We examine some solutions to that puzzle, including a more general specification of the utility function, the shift from an ex ante approach (valuing changes in life expectancy) to an ex post approach (valuing changes in distributions of realized longevities), as well as considering population ethical aspects. None of those solutions is fully successful in solving the puzzle.
Harun Onder
Pierre Pestieau
Gregory Ponthiere
Syrian War,conict,mortality,welfare,equivalent income,measurement
2017-09
An Experimental Test of the No Safety Schools Theorem
http://d.repec.org/n?u=RePEc:car:carecp:17-10&r=upt
In simultaneous search problems individuals choose a portfolio of risky options from a larger menu of options with utility determined by the portfolio’s option with the best ex-post outcome. Chade and Smith (2006) examine simultaneous search problems and show that the optimal portfolio includes the utility maximizing option and others that are riskier. However, Pallais (2015) shows that when individuals apply to more colleges, their decisions are inconsistent with theoretical predictions. We replicate this ?nding experimentally and show that subjects select similar portfolios when the payo?s are independent, suggesting subjects ignore the rival nature of the options.
David B. Johnson
Matthew D. Webb
Decision Making; Simultaneous Search; Correlation Neglect; Online Experiment; College Application
2017-09-06
Portfolio Allocation Problems between Risky Ambiguous Assets
http://d.repec.org/n?u=RePEc:kyo:wpaper:975&r=upt
This paper considers a portfolio allocation problem between a risky asset and an ambiguous asset, and investigates how the existence of ambiguity influences the optimal proportion invested in the two assets. By introducing the notion of ambiguity, we derive several sufficient conditions under which an investor decreases the optimal proportion invested in the ambiguous asset. Furthermore, as an application, we consider an international diversification problem, and show that the home bias puzzle is partially resolved.
Takao Asano
Yusuke Osaki
Home Bias Puzzle, Portfolio Allocation Problem, Smooth Ambiguity Model
2017-08
Bayesian versus Heuristic-based choice under sleep restriction and suboptimal times of day
http://d.repec.org/n?u=RePEc:apl:wpaper:17-07&r=upt
This paper examines the impact of a commonly experienced adverse cognitive state on decision making under uncertainty. Specifically, we administer an at-home sleep restriction protocol combined with random assignment to the time-of-day for decision making. Thus, we induce sleepiness in our subjects via sleep restriction as well as suboptimal time-of-day prior to administration of a Bayesian choice task. The specific task used discriminates between Bayesian choices that coincide with more simple reinforcement heuristic choices (in “Easy” trials) versus those that do not (in “Hard” trials), which is ideal given our underlying hypothesis that sleepy subjects are more likely to use simple heuristics. We first show that both circadian mismatch and sleep restriction significantly increase subjective sleepiness—this documents protocol validity. Our key behavioral results are that sleepy subjects are more likely to make a Bayesian inaccurate decision and more likely to make decisions consistent with a simple reinforcement heuristic, particularly in more cognitively difficult “Hard” trials. Secondary results show that stimulation of subject affect increased used of the simple decision heuristic but, when combined with sleep restriction, increased affect may increase task motivation and improve choice accuracy. These results offer new insights into the likely impact of sleepiness on decision making under uncertainty and highlight the potential negative impact on such cognitive states may have on accurate formation of probability assessments. Key Words:
David L. Dickinson
Todd McElroy
2017
Decision Theory with a Hilbert Space as Possibility Space
http://d.repec.org/n?u=RePEc:awi:wpaper:0637&r=upt
In this paper, we propose an interpretation of the Hilbert space method used in quantum theory in the context of decision making under uncertainty. For a clear comparison we will stay as close as possible to the framework of SEU suggested by Savage (1954). We will use the Ellsberg (1961) paradox to illustrate the potential of our approach to deal with well-known paradoxa of decision theory.
Eichberger, Jürgen
Pirner, Hans Jürgen
Decision theory; uncertainty; Ellsberg paradox; quantum theory; Hilbert space; possibility space
2017-09-11
Firms’ Uncertainty and Ambiguity
http://d.repec.org/n?u=RePEc:red:sed017:681&r=upt
see attachment
Martin Schneider
Kai Carstensen
Ruediger Bachmann
2017
A general multilevel estimation framework: Multivariate joint models and more
http://d.repec.org/n?u=RePEc:boc:usug17:03&r=upt
A tremendous amount of work has been conducted in the area of joint models in recent years, with new extensions constantly being developed as the methods become more widely accepted and utilised, especially as the availability of software increases. In this talk I will introduce work focused on developing an over-arching general framework, and usable software implementation called megenreg, for estimating many different types of joint models. This will allow the user to fit a model with any number of outcomes, each of which can be of various types (continuous, binary, count, ordinal, survival), with any number of levels, and with any number of random effects at each level. Random effects can then be linked between outcomes in a number of ways. Of course, all of this is nothing new, and can be done (far better) with gsem. My focus, and motivation for writing my own simplified/extended gsem is to extend the modelling capabilities to allow the inclusion of the expected value of an outcome (possibly time-dependent) or its gradient or integral or general function of it, in the linear predictor of another. Furthermore, I develop simple utility functions to allow the user to extend to non-standard distributions in an extremely simple way with a little Mata function, whilst still providing the complex syntax users of gsem will be familiar with. I’ll focus on a special case of the general framework, joint modelling of multivariate longitudinal outcomes and survival, and in particular discuss some of the challenges faced in estimating such complex models, such as high dimensional random effects, and describe how we can relax the normally distributed random effects assumption. I’ll also describe many new methodological extensions, particularly in the field of survival analysis, each of which is simple to implement in megenreg.
Michael Crowther
2017-09-14
Loss Aversion and the Quantity-Quality Tradeoff
http://d.repec.org/n?u=RePEc:chu:wpaper:17-20&r=upt
Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors, such as loss aversion, play in the tradeoffs workers face? We address these questions with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse participantsshift their attention from quality to quantity to a greater degree when quality is weakly incentivized. These results can inform managers of appropriate ways to structure contracts, and suggest benefits to personalizing contracts based on individual behavioral characteristics.
Jared Rubin
Anya Samek
Roman M. Sheremeta
quantity, quality, experiment, incentives, real effort, loss aversion
2017