Utility Models and Prospect Theory
http://lists.repec.orgmailman/listinfo/nep-upt
Utility Models and Prospect Theory
2016-11-27
Subjective Contingencies and Limited Bayesian Updating
http://d.repec.org/n?u=RePEc:cfr:cefirw:w0222&r=upt
We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.
Stefania Minardi
Andrei Savochkin
2016-10
Portfolio Benchmarking under Drawdown Constraint and Stochastic Sharpe Ratio
http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01388399&r=upt
We consider an investor who seeks to maximize her expected utility derived from her terminal wealth relative to the maximum performance achieved over a fixed time horizon, and under a portfolio drawdown constraint, in a market with local stochastic volatility (LSV). In the absence of closed-form formulas for the value function and optimal portfolio strategy, we obtain approximations for these quantities through the use of a coefficient expansion technique and nonlinear transformations. We utilize regularity properties of the risk tolerance function to numerically compute the estimates for our approximations. In order to achieve similar value functions, we illustrate that, compared to a constant volatility model, the investor must deploy a quite different portfolio strategy which depends on the current level of volatility in the stochastic volatility model.
Ankush Agarwal
Ronnie Sircar
portfolio optimization,drawdown,stochastic volatility,local volatility
2016-10-26
EXPECTED UTILITY MAXIMISATION FOR EXPONENTIAL LEVY MODELS WITH OPTION AND INFORMATION PROCESSES
http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01388047&r=upt
We consider expected utility maximisation problem for exponential Levy models and HARA utilities in presence of illiquid asset in portfolio. This illiquid asset is modelled by an option of European type on another risky asset which is correlated with the first one. Under some hypothesis on Levy processes, we give the expressions of information processes figured in maximum utility formula. As applications, we consider Black-Scholes models with correlated Brownian Motions, and also Black-Scholes models with jump part represented by Poisson process.
Lioudmila Vostrikova
utility maximisation, exponential Levy models, f-divergence minimal martingale measure, dual approach, entropy, Kullback-Leibler information, information processes
2016-10-26
Dynamic consistency of expected utility under non-classical(quantum) uncertainty
http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01324046&r=upt
Quantum cognition is a recent and rapidely growing field. In this paper we developan expected utility theory in a context of non-classical (quantum) uncertainty. We replace the classical state space with a Hilbert space which allows introducing the concept of quantum lottery. Within that framework we formulate sufficient and necessary axioms on preferences over quantum lotteries to establish a representation theorem. We show that demanding the consistency of choice behavior conditional on new information is equivalent to the von Neuman-Luders postulate applied to beliefs. In our context, dynamic consistency is shown not to secure Savage's Sure Thing Principle (in its dynamic version). Finally, we discuss the interpretation and value of our results for rationality and behavioral economics.
Vladimir Ivanovitch Danilov
Ariane Lambert-Mogiliansky
Vassili Vergopoulos
Quantum cognition
2016-05-31
The term structure of psychological discount rate: characteristics and functional forms
http://d.repec.org/n?u=RePEc:pra:mprapa:75111&r=upt
The discounted utility theory is a cornerstone of financial theory, particularly in inter-temporal asset pricing and portfolio management. This theory questioning has opened a whole field of research in psychology, economics, and management, and has undergone several enhancements recently. Its violation seems widely established and opened the way for the building of a more efficient framework to understand the individual time preferences. One improvement is related to the refining of the knowledge on the psychological discount function that underlies inter-temporal choices. In fact, an individual’s time preferences may be characterized by various discount functions such as the exponential, Hernstein, Harvey, proportional, Laibson, Rachlin, hyperbolic and generalized hyperbolic discount functions. Empirical validation of these proposed psychological discount rate term structures to explain individual preferences and the distribution of their parameters in a given population has been the subject of a number of recent studies. These researches have insufficiently question the problem of the validity of the proposed function on a given population. The aim of this research is to empirically study the shape and parameters of psychological discount functions that characterized a given population. Based on the data collected through an experimental study, the violation of the discounted utility theory is confirmed, which means that time preferences could not be characterized by an exponential discount function. This finding is consistent with other empirical studies and shows that the population is characterized by a decreasing impatience. In addition, it shows that the population is characterized by a heterogeneity of the psychological discount functions.
OUATTARA, Aboudou
DE LA BRUSLERIE, Hubert
discounted utility theory, psychological discount function, experimental study
2015-10-01
Destination performance: Introducing the utility function in the mean-variance space
http://d.repec.org/n?u=RePEc:pra:mprapa:75080&r=upt
Economic characteristics of home countries can cause considerable variations in the tourism demand. For example, the average level of expenditure per tourist varies from one origin to another and these variations may alter overtime. Thus different tourist nationalities are associated with different level of expenditures and risks. Therefore strategies aimed at minimizing the variations may become an important issue for the policy makers. In this paper, we aim to use the productivity measurement theory in a mean-variance space to a French region (Nord Pas-de-Calais) by introducing the utility function in a mean-variance framework. With this method, we can calculate the optimal portfolio share for each origin and give some useful political advices to the policy decision makers to improve the performance of the tourist sector.
Zhang, Linjia
Botti, Laurent
Petit, Sylvain
Productivity measurement; Mean-variance; Tourism efficiency; Efficiency decomposition; Utility function; Nord Pas-de-Calais
2016
Optimal Taxation with Risky Human Capital
http://d.repec.org/n?u=RePEc:cer:papers:wp553&r=upt
We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences. The optimal policies balance redistribution across agents, insurance against human capital shocks, and incentives to learn and work. In the optimum, i) if utility is separable in labor and learning effort, the inverse labor wedge follows a random walk, ii) if the utility is not separable then the “no distortion at the top” result does not apply, and iii) quantitatively, high-ability agents face very risky consumption while lowability agents are insured. The welfare gains from switching to an optimal tax system are large.
Marek Kapicka
Julian Neira
optimal taxation; income taxation; human capital;
2015-11
The Tree that Hides the Forest: A Note on Revealed Preference
http://d.repec.org/n?u=RePEc:aim:wpaimx:1639&r=upt
The common interpretation given to choice behavior that satisfies the traditional revealed preference axioms is that it results from the maximization of a single preference. We show that choice data alone does not enable one to rule out the possibility that the choice behavior that satisfies the revealed preference axioms is instead the result of the aggregation of a collection of distinct preferences. In particular, we show that any ordering is observationally equivalent to a majoritarian aggregation of a collection of distinct dichotomous orderings. We also show that any ordering is observationally equivalent to a Borda’s aggregation of a collection of distinct linear orderings.
João V. Ferreira
Revealed preference theory, Rationalization, Dichotomous preferences, Aggregation rules, Choice data
2016-10
Robust Social Decisions
http://d.repec.org/n?u=RePEc:hal:pseose:hal-01241819&r=upt
We propose and operationalize normative principles to guide social decisions when individuals potentially have imprecise and heterogeneous beliefs, in addition to conflicting tastes or interests. To do so we adapt the standard Pareto principle to those preference comparisons that are robust to belief imprecision and characterize social preferences that respect this robust principle. We also characterize a suitable restriction of this principle. The former principle provides stronger guidance when it can be satisfied; when it cannot, the latter always provides minimal guidance.
Eric Danan
Thibault Gajdos
Brian Hill
Jean-Marc Tallon
Unambiguous preferences,Pareto dominance,Prefer-ence aggregation,Social choice,Uncertainty
2015-12-11
Do Better Informed Investors Always Do Better?
http://d.repec.org/n?u=RePEc:cbt:econwp:16/29&r=upt
We investigate the value of additional, but imperfect, investment information using data from a singular source: auctions of yearling racehorses. Horse breeders possess superior information about their own horses and, in the setting we examine, have strong financial incentives to buy the best of these back at auction. Despite this, those they choose to repurchase subsequently perform significantly worse on average, earning 30% less at the racetrack than horses purchased by outsiders. This puzzling finding cannot be explained by differences in horse risk or breeder abilities, or by non-standard preferences or behavioral biases. Some weak evidence suggests that it partly reflects opportunity cost differences, but the primary puzzle remains. A little knowledge can apparently be dangerous, although the exact mechanism by which this occurs is unclear.
Glenn Boyle
Gerald Ward
information; auctions; racehorses; IPOs
2016-11-15