nep-evo New Economics Papers
on Evolutionary Economics
Issue of 2005‒02‒20
three papers chosen by
Matthew Baker
US Naval Academy, USA

  1. Individual Preferences for Giving By Ray Fisman; Shachar Kariv; Daniel Markovits
  2. A Stochastic Expected Utility Theory By Pavlo R. Blavatskyy
  3. On the distribution of stock-market returns - Implications of Evolutionary Finance By Stefan Reimann

  1. By: Ray Fisman; Shachar Kariv; Daniel Markovits
    Date: 2005–02–10
  2. By: Pavlo R. Blavatskyy
    Abstract: This paper proposes a new model that explains the violations of expected utility theory through the role of random errors. The paper analyzes decision making under risk when individuals make random errors when they compute expected utilities. Errors are drawn from the normal distribution, which is truncated so that the stochastic utility of a lottery cannot be greater (lower) than the utility of the highest (lowest) possible outcome. The standard deviation of random errors is higher for lotteries with a wider range of possible outcomes. It converges to zero for lotteries converging to a degenerate lottery. The model explains all major stylized empirical facts such as the Allais paradox and the fourfold pattern of risk attitudes. The model fits the data from ten well-known experimental studies at least as good as cumulative prospect theory.
    Keywords: decision theory, stochastic utility, expected utility theory, cumulative prospect theory
    JEL: C91 D81
  3. By: Stefan Reimann
    Abstract: Risk management and asset pricing benefit from simple functional descriptions of the distribution of real asset returns. Recently, several authors have proposed that asset returns in real stock markets are distributed according to a hyperbolic distribution. While asset returns are generated by trades over time, the natural question is: What does economic theory imply concerning return distributions? We propose a simple model of price formation and, thus, return distribution which is based on economic reasoning. The markets behavior is represented by a pair consisting of a time-constant strategy and a dynamical trading strategy generating a flow between funds. Simulations of the price dynamics generate returns with fat-tail behavior in line with that of a hyperbolic distribution.
    Keywords: Asset returns, hyperbolic distribution, evolutionary finance
    JEL: G12 C51

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