Utility Models and Prospect Theory
http://lists.repec.orgmailman/listinfo/nep-upt
Utility Models and Prospect Theory
2016-07-23
History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1511&r=upt
We use trading data from a sports wagering market to estimate individual risk preferences within the prospect-theory paradigm. The experimental-like features of this market greatly facilitate the estimation of risk preferences, while our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates i) extend support for existing experimental findings --- mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes --- to a real market setting that shares similarities with traditional financial markets, ii) reveal that risk attitude is widely heterogeneous and history-dependent, and iii) indicate that prospect theory can better explain the prevalence of the disposition effect than previously thought.
Angie ANDRIKOGIANNOPOULOU
Filippos PAPAKONSTANTINOU
Risk Preferences, State Dependence, History Dependence, Heterogeneity, Prospect Theory, Disposition Effect
Utilitarianism with and without expected utility
http://d.repec.org/n?u=RePEc:pra:mprapa:72578&r=upt
We give two social aggregation theorems under conditions of risk, one for constant population cases, the other an extension to variable populations. Intra and interpersonal comparisons are encoded in a single `individual preorder'. The individual preorder then uniquely determines the social preorder. The theorems have features that may be considered characteristic of Harsanyi-style utilitarianism, such as indifference to ex ante and ex post equality. If in addition the individual preorder satisfies expected utility, the social preorder must be represented by expected total utility. In the constant population case, this is the conclusion of the social aggregation theorem of Harsanyi (1955) under anonymity, but contra Harsanyi, it is derived without assuming expected utility at the social level. However, the theorems are also consistent with the rejection of all of the expected utility axioms, at both the individual and social levels. Thus expected utility is inessential to Harsanyi's approach under anonymity. In fact, the variable population theorem imposes only a mild constraint on the individual preorder, while the constant population theorem imposes no constraint at all. We therefore give further results related to additional constraints on the individual preorder. First, stronger utilitarian-friendly assumptions, like Pareto or strong separability, are essentially equivalent to the main expected utility axiom of strong independence. Second, the individual preorder satisfies strong independence if and only if the social preorder has a mixture-preserving total utility representation; here the utility values can be taken as vectors in a preordered vector space, or more concretely as lexicographically ordered matrices of real numbers. Third, if the individual preorder satisfies a `local expected utility' condition popular in nonexpected utility theory, then the social preorder is `locally utilitarian'.
McCarthy, David
Mikkola, Kalle
Thomas, Teruji
Harsanyi, utilitarianism, expected utility, nonexpected utility, egalitarianism, variable populations.
2016-07-19
Theory Matters for Financial Advice!
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1422&r=upt
We show that the optimal asset allocation for an investor depends crucially on the theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The client data is determined by a standard risk profiling question and the theories we apply are mean-variance analysis, expected utility analysis and cumulative prospect theory.
Thorsten HENS
János MAYER
Cumulative Prospect Theory, Expected Utility Analysis, Mean Variance Analysis
Subjective Independence and Concave Expected Utility
http://d.repec.org/n?u=RePEc:pit:wpaper:5866&r=upt
When a potential hedge between alternatives does not reduce the exposureto uncertainty, we say that the decision maker considers these alternativesstructurally similar. We o er a novel approach and suggest that structural similarityis subjective and should be diff erent across decision makers. Structural similaritycan be recovered through a property of the individual's preferences referred to assubjective codecomposable independence. This property characterizes a class of event-separablemodels and allows us to diff erentiate between perception of uncertainty andattitude towards it. In addition, our approach provides a behavioral foundation toConcave Expected Utility preferences.
Roee Teper
2015-01
Eliciting the just-noticeable difference
http://d.repec.org/n?u=RePEc:oxf:wpaper:798&r=upt
In this paper we provide the testable implications for the model of consumer choice with just-noticeable diï¬€erences. A preference relation admits such a representation whenever there is a utility function u and a constant δ such that bundlex is preferred to y if and only if u(x)≥u(y)+δ. Equivalently,we say that the relation is a semiorder. We introduce a necessary and suï¬ƒcient condition under whicha finite set of observations can be rationalised with the above model. Specifically, our restriction weakens the well-known generalised axiom of revealed preference,or GARP for short. In addition, we argue that the condition allows to determine an informative and computationally eï¬ƒcient measure of violations of GARP.
Pawel Dziewulski
just-noticeable difference, revealed preference, Afriat's theorem, generalised budget sets, Afriat's efficiency index, money-pump index
2016-07-06
Subjective Independence and Concave Expected Utility
http://d.repec.org/n?u=RePEc:pit:wpaper:5865&r=upt
When a potential hedge between alternatives does not reduce the exposureto uncertainty, we say that the decision maker considers these alternativesstructurally similar. We o er a novel approach and suggest that structural similarityis subjective and should be diff erent across decision makers. Structural similaritycan be recovered through a property of the individual's preferences referred to assubjective codecomposable independence. This property characterizes a class of event-separablemodels and allows us to diff erentiate between perception of uncertainty andattitude towards it. In addition, our approach provides a behavioral foundation toConcave Expected Utility preferences.
Roee Teper
2015-01
Cumulative Prospect Theory and Mean Variance Analysis: A Rigorous Comparison
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1423&r=upt
We compare asset allocations that are derived for cumulative prospect theory (CPT) based on two different methods: maximizing CPT along the mean {variance efficient frontier and maximizing CPT without this restriction. We find that with normally distributed returns, the difference between these two approaches is negligible. However, if standard asset allocation data for pension funds are considered, the difference is considerable. Moreover, for certain types of derivatives, such as call options, the restriction of asset allocations to the mean-variance efficient frontier produces sizable losses in various respects, including decreases in expected returns and expected utility.
Thorsten HENS
János MAYER
Cumulative Prospect Theory, Mean Variance Analysis
Fashion, fads and the popularity of choices: micro-foundations for non-equilibrium consumer theory
http://d.repec.org/n?u=RePEc:arx:papers:1607.04155&r=upt
Knowledge acquisition by consumers is a key process in the diffusion of innovations. However, in standard theories of the representative agent, agents do not learn and innovations are adopted instantaneously. Here, we show that in a discrete choice model where utility-maximising agents with heterogenous preferences learn about products through peers, their stock of knowledge on products becomes heterogenous, fads and fashions arise, and transitivity in aggregate preferences is lost. Non-equilibrium path-dependent dynamics emerge, the representative agent exhibits behavioural rules different than individual agents, and aggregate utility cannot be optimised. Instead, an evolutionary theory of product innovation and diffusion emerges.
Jean-Francois Mercure
2016-07
Super-Exponential Endogenous Bubbles in an Equilibrium Model of Fundamentalist and Chartist Traders
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1507&r=upt
We introduce a model of super-exponential financial bubbles with two assets (risky and risk-free), in which fundamentalist and chartist traders co-exist. Fundamentalists form expectations on the return and risk of a risky asset and maximize their constant relative risk aversion expected utility with respect to their allocation on the risky asset versus the risk-free asset. Chartists are subjected to social imitation and follow momentum trading. Allowing for random time-varying herding propensity, we are able to reproduce several well-known stylized facts of financial markets such as a fat-tail distribution of returns and volatility clustering. In particular, we observe transient faster-than-exponential bubble growth with approximate log-periodic behavior and give analytical arguments why this follows from our framework. The model accounts well for the behavior of traders and for the price dynamics that developed during the dotcom bubble in 1995-2000. Momentum strategies are shown to be transiently profitable, supporting these strategies as enhancing herding behavior.
Taisei KAIZOJI
Matthias LEISS
Alexander I. SAICHEV
Didier SORNETTE
financial bubbles, faster-than-exponential growth, social imitation, momentum trading, chartists dotcom bubble
Weak Dependence of CRRA on Standard Deviation in the Case of Truncated Normal Distribution of Returns
http://d.repec.org/n?u=RePEc:ven:wpaper:2016:18&r=upt
This paper analyzes the dependence of the Certainty Equivalent Return of a Constant Relative Risk Aversion, CER[CRRA], on the Standard Deviation of the Return with the hypothesis of a Truncated Normal distribution of returns and for some level of Relative Risk Aversion (RRA) parameter. The paper compares this dependence with those detected by an Annualized Geometrical Return (AGR) and by CER of the Quadratic Utility Function, CER[Q]. The behavior of CER[CRRA] is more similar to AGR than CER[Q] and only for a higher value of RRA is it possible to find substantial differences, even if in this case we find values of Standard Deviation that have discontinuity points for the concavity. Using a ranking criteria equal to the one introduced by Morningstar for a set of Funds, the paper shows that, in a wide range for monthly Standard Deviation and Mean of the Returns, the ranking done by CER[CRRA] is similar to the one induced by AGR, and that a CER[Q] has essentially different behavior. It will be shown that Morningstar ranking may be considered a particular case of the CER[CRRA] and thus all the considerations can be applied to the well-known Morningstar Rating methodology. An application is made to Italian Pension Funds.
Fausto Corradin
Domenico Sartore
quadratic utility function, positive and negative returns, absolute risk aversion, Morningstar rating, Italian Pension Fund
2016
Plans of Action
http://d.repec.org/n?u=RePEc:pit:wpaper:5859&r=upt
We introduce a decision theoretic foundation for a class of learning models in which thedecision maker's beliefs over the present uncertainty is dictated by the outcomes of herpast actions. This type of learning underlies models of strategic experimentation. Weconstruct a framework in which an alternative is a recursive function contingent at anystage on the outcomes of previous actions, and provide axiomatizations for subjectivediscounted expected utility maximization, both for independent actions and correlatedactions. We point out that models of strategic experimentation have inherent limitedobservability, which in turn leads to partial identification of the subjective belief structure. We show that a class of processes we refer to as strongly exchangeable are the fullcharacterization of Bayesianism in such environments.
Roee Teper
2016-01
Dynamic Contracts Under Loss Aversion
http://d.repec.org/n?u=RePEc:pit:wpaper:5868&r=upt
We analyze a dynamic moral hazard principal-agent model with an agent who is lossaverse and whose reference updates according to the previous periodâ€™s consumption.When there is full commitment and the agent has no access to credit, in every periodafter the first the optimal payment scheme is insensitive to the current outcome in an interval,offering to pay the reference for a set of performance measures. Therefore, thereis a positive probability of observing wage persistence even if outcomes vary over time.Moreover, the model predicts a â€œstatus quo biasâ€ â€“a preference for consuming the fullallocation if the agent is allowed to intertemporally reallocate consumption after the outcomeis realized. This result in turn implies that unlike the canonical model, the optimalcontract may be implemented even when the agent has access to a savings technology.We use subdifferential calculus to address the non-differentiable utility function.
Sofia Moroni
2016-01
Are Behavioral Biases Stable Across Markets and Prevalent Across Individuals? Evidence from Individual Betting Choices
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1420&r=upt
In this paper we introduce and study positional portfolio management. In a positional allocation strategy, the manager maximizes an expected utility function written on the cross-sectional rank (position) of the portfolio return. The objective function reflects the goal of the manager to be well ranked among his/her competitors. To implement positional allocation strategies, we specify a nonlinear unobservable factor model for the asset returns. The model disentangles the dynamic of the cross-sectional distribution of the returns and the dynamic of the ranks of the individual assets within the cross-sectional distribution. We estimate the model on a large set of stocks traded in the NYSE, AMEX and NASDAQ markets between 1990/1 and 2009/12, and implement the positional strategies for different investment universes. The positional strategies outperform standard momentum, reversal and mean-variance allocation strategies for most criteria. Moreover, the positional strategies outperform the equally weighted portfolio for criteria based on position.
Patrick GAGLIARDINI
Christian GOURIEROUX
Mirco RUBIN
Positional Good, Robust Portfolio Management, Rank, Factor Model, Big Data, Equally Weighted Portfolio, Momentum, Positional Risk Aversion
Nonparametric analysis of random utility models
http://d.repec.org/n?u=RePEc:ifs:cemmap:27/16&r=upt
This paper develops and implements a nonparametric test of Random Utility Models. The motivating application is to test the null hypothesis that a sample of cross-sectional demand distributions was generated by a population of rational consumers. We test a necessary and sucient condition for this that does not rely on any restriction on unobserved heterogeneity or the number of goods. We also propose and implement a control function approach to account for endogenous expenditure. An econometric result of independent interest is a test for linear inequality constraints when these are represented as the vertices of a polyhedron rather than its faces. An empirical application to the U.K. Household Expenditure Survey illustrates computational feasibility of the method in demand problems with 5 goods.
Yuichi Kitamura
Jörg Stoye
2016-06-14
The Impact of Risk Attitudes on Financial Investments
http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-10-15&r=upt
Several scholars analyze the relationship between individuals' willingness to take risks and financial investment decisions. We add to this literature in using data from the German Socio-Economic Panel which allow ruling out that investments in risky assets itself impact on risk attitudes. We show that individuals with a higher willingness to take risks are more likely to hold bonds, stocks, and company assets. When grouping individuals into risk groups, our results reveal that high risk takers are also less likely to own a life insurance. If endogenous adaption of risk attitudes from holding assets in previous years is not taken into account, the impact of risk attitudes on holding risky assets is upward biased.
Hyll, Walter
Irrek, Maike
risk attitudes,financial investment,portfolio choice,reverse causality,German Socio-Economic Panel
2015
Testing Gollier and Weitzman’s Solution of the “Weitzman-Gollier Puzzle”
http://d.repec.org/n?u=RePEc:pra:mprapa:72593&r=upt
Despite the fact that the “Weitzman-Gollier Puzzle” arose in the context of risk neutrality, Gollier and Weitzman (2009) claimed to have solved the puzzle by showing that, in case of risk aversion, discounting and compounding approaches yield the same result, and that these can be expressed in ways that are morphologically similar to the conflicting formulations of the original risk neutral model. This paper replicates their analysis with a simple numerical example and shows that the equality of results obtained is due to discount and compound factors being each other’s reciprocals in the risk averse model, while the inequality of the puzzle is due to this condition not being met in the risk neutral case. Their claim to have solved the puzzle is not sustained. It is shown that the source of the puzzle is Weitzman’s incorrect specification of the present value factor and that, correcting for this, the right conclusion under his assumptions is that certainty equivalent discount rates are growing functions of time. Gollier and Weitzman (2009) also claimed that “the ‘effective’ discount rate must decline over time toward its lowest possible value.” This paper finds that when long term market yields are a growing function of time, it makes no sense to invest in projects of similar risk but lesser yield, irrespective of one’s degree of risk aversion.
Szekeres, Szabolcs
Discounting, uncertainty, "Weitzman-Gollier Puzzle"
2016-07-17
Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance
http://d.repec.org/n?u=RePEc:not:notcdx:2016-09&r=upt
We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agentsâ€™ performance. Agentsâ€™ performance is higher in the presence of goal setting despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. The pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives.
Brice Corgnet
Joaquin Gomez-Minambres
Roberto Hernan-Gonzalez
Principal-agent models, incentive theory, non-monetary incentives, goal setting, reference-dependent utility, laboratory experiments.
2016-09
Evolutionary Behavioural Finance
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1516&r=upt
The paper reviews a new research field that develops evolutionary and behavioural approaches for the modeling of financial markets. The main objective is to create a plausible alternative to the conventional Walrasian equilibrium theory based on the hypothesis of full rationality of market players. Rather than maximizing typically unobservable individual utility functions, traders/investors are permitted to have a whole variety of patterns of strategic behaviour depending on their individual psychology. The models considered in this field combine elements of evolutionary game theory (solution concepts) and stochastic dynamic games (strategic frameworks).
Igor V. EVSTIGNEEV
Thorsten HENS
Klaus Reiner SCHENK-HOPPÉ
Nonparametric Estimation of First-Price Auctions with Risk-Averse Bidders
http://d.repec.org/n?u=RePEc:pit:wpaper:5855&r=upt
This paper proposes nonparametric estimators for the bidders' utility function and density of private values in a first-price sealed-bid auction model with independent valuations. I study a setting with risk-averse bidders and adopt a fully nonparametric approach by not placing any restrictions on the shape of the utility function beyond regularity conditions. I propose a population criterionfunction that has a unique minimizer, which characterizes the utility function and density of private values. The resulting estimators emerge after replacing the population quantities by sample analogues. These estimators are uniformly consistent and their convergence rates are established. Monte Carlo experiments show that the proposed estimators perform well in practice.
Federico Zincenko
2016-01
Emotion Research in Economics
http://d.repec.org/n?u=RePEc:jgu:wpaper:1611&r=upt
Emotions were central to the development of economics, especially in utility theory in classical economics. While neoclassical utility theory basically abolished emotions, behavioural economics more recently reintroduced emotions in utility theory. Beyond utility theory, economic theorists use emotions to explain behaviour which otherwise could not be understood or they study emotions out of interest for the emotion itself. While some analyses display a strong overlap between psychological thinking and economic modelling, in most cases there is still a large gap between economic and psychological approaches to emotion research. Ways how to reduce this gap are discussed.
Klaus Wälde
utility theory, ex-ante emotions, immediate emotions, ex-post emotions belief-based emotions, regret, desire, stress, anxiety, guilt
2016-06
An ergodic BSDE approach to entropic risk measure and its large time behavior
http://d.repec.org/n?u=RePEc:arx:papers:1607.02289&r=upt
This paper shows that the long-time behavior of the entropic risk measure (under both forward performance process framework and classical utility framework) converges to a constant, which is independent of the initial state of the stochastic factors in a stochastic factor model. The exponential convergence rate to the long-term limit is also obtained by using ergodic backward stochastic differential equation method. Finally, the paper establishes a connection between the two notions of entropic risk measures and their large time behavior.
Wing Fung Chong
Ying Hu
Gechun Liang
Thaleia Zariphopoulou
2016-07
Portfolio Delegation and Market Efficiency
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1409&r=upt
We develop a two-period general equilibrium model of portfolio delegation with competitive, differentially skilled managers and convex compensation contracts. We show that convex incentives lead to significant equilibrium mispricing, but reduce price volatility. In particular, price informativeness and volatility may exhibit opposite behaviour. Investors do not internalize the externality that their contract choice has on equilibrium prices. As a result, equilibrium incentives may be too strong or too weak and hurt investors as a whole. For example, investors' utility may be decreasing in the average managers' skill. Convex incentives amplify this negative externality. Indirect incentives due to future fund flows may induce investors to choose stronger convex direct incentives, amplifying inefficiencies even further. Inference of skill from performance is asymmetric: past bad performance is indicative of low skill, but past good performance is not indicative of high skill.
Semyon MALAMUD
Evgeny PETROV
portfolio delegation, optimal incentives, contracts, asymmetric information, informational efficiency
Prospect Theory in the Heterogeneous Agent Model
http://d.repec.org/n?u=RePEc:fau:wpaper:wp2016_14&r=upt
Using the Heterogeneous Agent Model framework, we incorporate an extension based on Prospect Theory into a popular agent-based asset pricing model. The extension covers the phenomenon of loss aversion manifested in risk aversion and asymmetric treatment of gains and losses. Using Monte Carlo methods, we investigate behavior and statistical properties of the extended model and assess its relevance with respect to financial data and stylized facts. We show that the Prospect Theory extension keeps the essential underlying mechanics of the model intact, however, that it changes the model dynamics considerably. Stability of the model increases but the occurrence of the fundamental strategy is more extreme. Moreover, the extension shifts the model closer to the behavior of real-world stock markets.
Jan Polach
Jiri Kukacka
Heterogeneous Agent Model, Prospect Theory, Behavioral Finance, Stylized facts
2016-07
Long/Short Equity Hedge Funds and Systematic Ambiguity
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1405&r=upt
This study presents a hedge fund portfolio choice model for an investor facing ambiguity. In the empirical section, we measure ambiguity as the cross-sectional dispersion in Industrial Production growth and in stock market return forecasts, and we construct the systematic ambiguity factors from the universe of S&P 500 stocks. We estimate ambiguity betas for long/short equity hedge funds strategies and document signi cant ambiguity exposures for directional L/S equity hedge funds. We compare the out-of-sample performance of portfolios constructed according to the L/S hedge fund alphas' ranking with and without systematic ambiguity exposures and nd that the former outperform.
Rajna Gibson BRANDON
Nikolay RYABKOV
Ambiguity, Asset Allocation, Long/Short Equity Hedge Funds, Performance Measurement
Asset Prices with Temporary Shocks to Consumption
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1441&r=upt
Most standard asset-pricing models assume that all shocks to consumption are permanent. We relax this assumption and allow also for temporary shocks. The implications of our model are dramatically different from those obtained in the prior literature. A canonical and parsimonious asset pricing model with CRRA preferences and temporary shocks can reproduce the equity premium, high return volatility and return predictability with a coefficient of relative risk aversion below ten. This finding suggests that temporary shocks can play an important role in explaining asset pricing puzzles.
Walter POHL
Karl SCHMEDDERS
Ole WILMS
Asset prices, equity premium, unit root, temporary shocks
The Common Origin of Uncertainty Shocks
http://d.repec.org/n?u=RePEc:nbr:nberwo:22384&r=upt
Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this just amount to inventing new, exogenous, unobserved shocks to explain challenging features of business cycles? This paper argues that three conceptually distinct fluctuations, all called uncertainty shocks, have a common origin. Specifically, we propose a mechanism that generates micro uncertainty (uncertainty about firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order uncertainty (disagreement) shocks from a common origin and causes them to covary, just as they do in the data. When agents use standard maximum likelihood techniques and real-time data to re-estimate parameters that govern the probability of disasters, the result is that micro, macro and higher-order uncertainty fluctuate and covary just like their empirical counterparts. Our findings suggest that time-varying disaster risk and the many types of uncertainty shocks are not distinct phenomena. They are outcomes of a quantitatively plausible belief updating process.
Nicholas Kozeniauskas
Anna Orlik
Laura Veldkamp
2016-07
Noisy Arrow-Debreu Equilibria
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1509&r=upt
I develop a noisy rational expectations equilibrium model with a continuum of states and a full set of options that render the market complete. I show a major difference in equilibrium behaviour between models with constant absolute risk aversion (CARA) and non-CARA preferences. First, when informed traders have non-CARA preferences, all equilibria are fully revealing, independent of the amount of noise in the supply. Second, when informed traders have CARA preferences, but uninformed traders have non-CARA preferences, the set of equilibria contains a fully revealing equilibrium and a minimally revealing equilibrium. The latter reveals the minimal possible amount of information and is highly inefficient: In this equilibrium, Arrow-Debreu state prices are not sufficient to recover the information contained in the noisy aggregate demand and supply. My results have important implications for price discovery through options.
Semyon MALAMUD
asymmetric information, options, price discovery, Arrow-Debreu state prices
Bankruptcy Problems with Reference-Dependent Preferences
http://d.repec.org/n?u=RePEc:tur:wpapnw:038&r=upt
We study bankruptcy problems under the assumption that claimants have reference-dependent preferences. We show that in such a context, standard allocative rules are no longer equivalent from the viewpoint of the level of welfare that they generate. A clear ranking of the most prominent rules actually emerges. Welfare thus becomes an additional dimension that an arbitrator may want to consider in deciding which allocation to implement. We then introduce a new rule that always maximizes welfare and discuss its pros and cons.
Andrea Gallice
Bankruptcy Problems, Claims, Reference-Dependent Preferences, Welfare.
2016-07
Efficeincy Gains in Rank-ordered Multinomial Logit Models
http://d.repec.org/n?u=RePEc:pit:wpaper:5878&r=upt
This paper considers estimation of discrete choice models when agents report their rankingof the alternatives (or some of them) rather than just the utility maximizing alternative. Weinvestigate the parametric conditional rank-ordered Logit model. We show that conditionsfor identifi cation do not change even if we observe ranking. Moreover, we ll a gap in theliterature and show analytically and by Monte Carlo simulations that efficiency increases as weuse additional information on the ranking.
Arie Beresteanu
2016-01
Hit or Miss? Test Taking Behavior in Multiple Choice Exams
http://d.repec.org/n?u=RePEc:nbr:nberwo:22401&r=upt
We model and estimate the decision to answer questions in multiple choice tests with negative marking. Our focus is on the trade-off between precision and fairness. Negative marking reduces guessing, thereby increasing accuracy considerably. However, it reduces the expected score of the more risk averse, discriminating against them. Using data from the Turkish University Entrance Exam, we find that students' attitudes towards risk differ according to their gender and ability. Women and those with high ability are significantly more risk averse: nevertheless, the impact on scores of such differences is small, making a case for negative marking.
Ş. Pelin Akyol
James Key
Kala Krishna
2016-07
Recommendation based on multiproduct utility maximization
http://d.repec.org/n?u=RePEc:zbw:wzbmdn:spii2016503&r=upt
Recommender systems often recommend several products to a user at the same time, but with little consideration of the relationships among the recommended products. We argue that relationships such as substitutes and complements are crucial, since the utility of one product may depend on whether or not other products are purchased. For example, the utility of a camera lens is much higher if the user has the appropriate camera (complements), and the utility of one camera is lower if the user already has a similar camera (substitutes). In this paper, we propose multi-product utility maximization (MPUM) as a general approach to account for product relationships in recommendation systems. MPUM integrates the economic theory of consumer choice theory with personalized recommendation, and explicitly considers product relationships. It describes and predicts utility of product bundles for individual users. Based on MPUM, the system can recommend products by considering what the users already have, or recommend multiple products with maximum joint utility. As the estimated utility has mon- etary unit, other economic based evaluation metrics such as consumer surplus or total surplus can be incorporated naturally. We evaluate MPUM against several popular base- line recommendation algorithms on two offline E-commerce datasets. The experimental results showed that MPUM significantly outperformed baseline algorithm under top-K evaluation metric, which suggests that the expected number of accepted/purchased products given K recommendations are higher.
Zhao, Qi
Zhang, Yongfeng
Zhang, Yi
Friedman, Daniel
Recommendation Systems,Utility,Product Portfolio,Computational Economics
2016
Trading with Small Price Impact
http://d.repec.org/n?u=RePEc:chf:rpseri:rp1417&r=upt
An investor trades a safe and several risky assets with linear price impact to maximize expected utility from terminal wealth. In the limit for small impact costs, we explicitly determine the optimal policy and welfare, in a general Markovian setting allowing for stochastic market, cost, and preference parameters. These results shed light on the general structure of the problem at hand, and also unveil close connections to optimal execution problems and to other market frictions such as proportional and fixed transaction costs.
Ludovic MOREAU
Johannes MUHLE-KARBE
Halil Mete SONER
price impact, portfolio choice, asymptotics, homogenization
Insurance valuation: a computable multi-period cost-of-capital approach
http://d.repec.org/n?u=RePEc:arx:papers:1607.04100&r=upt
We present an approach to market-consistent multi-period valuation of insurance liability cash flows based on a two-stage valuation procedure. First, a portfolio of traded financial instrument aimed at replicating the liability cash flow is fixed. Then the residual cash flow is managed by repeated one-period replication using only cash funds. The latter part takes capital requirements and costs into account, as well as limited liability and risk averseness of capital providers. The cost-of-capital margin is the value of the residual cash flow. We set up a general framework for the cost-of-capital margin and relate it to dynamic risk measurement. Moreover, we present explicit formulas and properties of the cost-of-capital margin under further assumptions on the model for the liability cash flow and on the conditional risk measures and utility functions. Finally, we highlight computational aspects of the cost-of-capital margin, and related quantities, in terms of an example from life insurance.
Hampus Engsner
Mathias Lindholm
Filip Lindskog
2016-07