Utility Models and Prospect Theory
http://lists.repec.orgmailman/listinfo/nep-upt
Utility Models and Prospect Theory
2015-11-21
Some (Mis)facts about Myopic Loss Aversion
http://d.repec.org/n?u=RePEc:ivi:wpasad:2015-09&r=upt
Gneezy and Potters (1997) run an experiment to test the empirical content of Myopic Loss Aversion (MLA). They find that the attractiveness of a risky asset depends upon the investors’ time horizon: consistently with MLA, individuals are more willing to take risks when they evaluate their investments less frequently. This paper shows that these experimental findings can be easily accommodated by the most standard version of Expected Utility Theory, namely a CRRA specification. Additionally, we use four different datasets to estimate a CRRA model and two alternative MLA versions, together with various mixture specifications of the two competing models. Our econometric exercise finds little evidence of subjects’ loss aversion, which provides empirical ground for our theoretical claim.
Iñigo Iturbe-Ormaetxe Kortajarene
Giovanni Ponti
Josefa Tomás Lucas
Expected Utility Theory, Myopic Loss Aversion, Evaluation Period
2015-11
Problems of utility and prospect theories. A “certain–uncertain” inconsistency within their experimental methods
http://d.repec.org/n?u=RePEc:pra:mprapa:67911&r=upt
In random–lottery incentive experiments, the choices of certain outcomes are stimulated by uncertain lotteries. This “certain–uncertain” inconsistency is evident, but only recently emphasized. Because of it, conclusions from a random–lottery incentive experiment that includes a certain outcome cannot be unquestionably correct. Well-known experimental results and purely mathematical theorems support this. The main result presented here is: The usual experimental systems of utility and prospect theories may need additional independent analyses in the context of the “certain–uncertain” inconsistency.
Harin, Alexander
utility; prospect theory; experiment; incentive; random-lottery incentive system; Prelec; probability weighting function;
2015-11-16
Expected Indirect Utility in an Ergodically Chaotic Overlapping Generations Model
http://d.repec.org/n?u=RePEc:rza:wpaper:559&r=upt
The chaotic and ergodic equilibrium consumption profiles of a two period lived representative agent overlapping generations model are examined. Given a specific utility function, it is shown that for a typical equilibrium path expected indirect utility of consumption is less than the utility of expected equilibrium consumption. In turn, utility of expected consumption in equilibrium is less than utility at the steady state equilibrium. This result holds for a set of equilibrium maps of positive measure and suggests that stabilisation of the erratic system would bring about an improvement in welfare.
Richard Charlton
2015
Optimal Investment with Transaction Costs under Cumulative Prospect Theory in Discrete Time
http://d.repec.org/n?u=RePEc:arx:papers:1511.04768&r=upt
We study optimal investment problems with transaction costs under Kahneman and Tversky's cumulative prospective theory (CPT). A CPT investor makes investment decisions in a single-period discrete time financial market consisting of one risk-free asset and one risky asset, in which trading the risky asset incurs proportional costs. The objective is to seek the optimal investment to maximize the prospect value of the investor's final wealth. We have obtained explicit optimal investment to this problem in two examples. An economic analysis is conducted to investigate the impact of the transaction costs and risk aversion on the optimal investment.
Bin Zou
Rudi Zagst
2015-11
Health shocks and risk aversion
http://d.repec.org/n?u=RePEc:zbw:rwirep:581&r=upt
Risk preferences are typically assumed to be constant for an individual across the life cycle. In this paper we empirically assess if they are time varying. Specifically, we analyse whether health shocks influence individual risk aversion. We follow an innovative approach and use grip strength data to obtain an objective health shock indicator. In order to account for the non-random nature of our data we employ regression-adjusted matching. Health shocks are found to increase individual risk aversion. The finding is robust to a series of sensitivity analyses.
Decker, Simon
Schmitz, Hendrik
risk preferences,health shocks,hand grip strength,regression-adjusted matching
2015