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on Utility Models and Prospect Theories |
| By: | Thomas Papon (EUREQua) |
| Abstract: | This paper reports results from an experimental study that investigates insurance behaviours in low-probability high-loss risk situations. This study reveals that insurance behaviours may depend on the individual prior experience towards risk. It may also depend on the duration of the commitment period, namely the period during which individuals commit themselves to maintain the same insurance decision. Non-additive decision models such as Dual Theory and Cumulative Prospect Theory seem to have a higher descriptive power than Expected Utility Theory when explaining subjects' behaviours. This paper presents a direct experimental test of the prediction of Myopic Prospect Theory relative to insurance demand. This study is also designed to test the significance of gambler's fallacy and availability bias in the insurance decision process. These theoretical concepts help to understand many behaviours commonly observed in reality but which remain unexplained within the E.U framework. In particular, this paper provides new explanations about the puzzling fact that people usually fail to obtain insurance against disaster-type risks such as natural disasters, even when premiums are close to actuarially fair levels. According to our experimental results, the deficiency of insurance demand for natural disasters may be due to the lack of individual prior experience towards such risks ; as well as the relatively short commitment period of insurance policies (usually one fiscal year) compared with the empirical frequency of major natural hazards (centennial and even more). |
| Keywords: | Insurance demand, Low-probability high-consequence risks, heuristics and bias in risk perception, experimental methodology, Cumulative Prospect Theory, Dual Theory. |
| JEL: | C90 C91 D1 D81 D84 G22 M31 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b04083&r=upt |
| By: | Yves Balasko (Paris-Jourdan Sciences Économiques (PSE)); Mich Tvede (Department of Economics, University of Copenhagen) |
| Abstract: | Sets consisting of finite collections of prices and endowments such that total resources are constant, or collinear, or approximately collinear, can always be viewed as subsets of some equilibrium manifold. The additional requirement that such collections of price-endowment data are compatible with some individual preference rankings is reduced to the existence of solutions to some set of linear inequalities and equalities. This characterization enables us to give simple proofs of the contractibility of the set whose elements are finite equilibrium data collections compatible with given individual preference rankings and the path-connectedness of the set made of finite equilibrium data set. |
| JEL: | D11 D12 D51 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0523&r=upt |
| By: | Paola Ferretti (Department of Applied Mathematics - University Ca' Foscari Venice) |
| Abstract: | This paper defines temporal risk aversion in the context of a simple choice framework: that of time varying utility of wealth. The attention is focused on a decision maker who acts as a buyer: temporal risk premium, instantaneous risk premium and time preference premium are defined. |
| Keywords: | temporal utility; buyer-seller viewpoints; temporal risk premium; instantaneous risk premium; time preference premium. |
| JEL: | C7 D8 |
| Date: | 2005–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpga:0511010&r=upt |
| By: | Chaiki Hara (Faculty of Economics and Politics, University of Cambridge); Atsushi Kajii (Institute of Economic Research, Kyoto University) |
| Abstract: | We consider an exchange economy under uncertainty, in which agentsf utility functions exhibit constant absolute risk aversion, but they may be recursive and the expected utility calculation may be based on multiple subjective beliefs. The risk aversion coefficients, subjective beliefs, subjective time discount factors, initial endowments, and tradeable assets may differ across agents. We prove that the risk-free bond price goes down (and the interest rate goes up) monotonically as the markets become more complete. We find the range of equilibrium bond prices that depends on the primitives of the economy but not on the structures of financial markets. |
| Keywords: | multiple priors; no trade; dynamic consistency; interim efficiency; rectangularityi |
| JEL: | D52 D91 E21 E44 G12 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:590&r=upt |
| By: | David Colander |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0528&r=upt |
| By: | David Hummels; Volodymyr Lugovskyy |
| Abstract: | Models with constant-elasticity of substitution (CES) preferences are commonly employed in the international trade literature because they provide a tractable way to handle product differentiation in general equilibrium. However this tractability comes at the cost of generating a set of counter-factual predictions regarding cross-country variation in export and import variety, output per variety, and prices. We examine whether a generalized version of Lancaster's 'ideal variety' model can better match facts. In this model, entry causes crowding in variety space, so that the marginal utility of new varieties falls as market size grows. Crowding is partially offset by income effects, as richer consumers will pay more for varieties closer matched to their ideal types. We show theoretically and confirm empirically that declining marginal utility of new varieties results in: a higher own-price elasticity of demand (and lower prices) in large countries and a lower own-price elasticity of demand (and higher prices) in rich countries. Model predictions about cross-country differences in the number and size of establishments are also empirically confirmed. |
| JEL: | F1 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11828&r=upt |
| By: | Atsushi Kajii (Institute of Economic Research, Kyoto University); Hiroyuki Kojima (Department of Economics, Teikyo University); Takashi Ui (Faculty of Economics, Yokohama National University) |
| Abstract: | This paper proposes a class of weak additivity concepts for an operator on the set of real valued functions on a finite state space \omega, which include additivity and comonotonic additivity as extreme cases. Let \epsilon be a collection of subsets of \omega. Two functions x and y on \omega are \epsilon-cominimum if, for each E \subseteq \epsilon, the set of minimizers of x restricted on E and that of y have a common element. An operator I on the set of functions on is E- cominimum additive if I(x+y) = I(x)+I(y) whenever x and y are \epsilon-cominimum. The main result characterizes homogeneous E-cominimum additive operators in terms of the Choquet integrals and the corresponding non-additive signed measures. As applications, this paper gives an alternative proof for the characterization of the E-capacity expected utility model of Eichberger and Kelsey (1999) and that of the multi-period decision model of Gilboa (1989). |
| Keywords: | Choquet integral; comonotonicity; non-additive probabilities; capacities; cooperative games |
| JEL: | C71 D81 D90 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:601&r=upt |
| By: | Edward B. Barbier; Michael Rauscher (University of Rostock) |
| Abstract: | This paper looks at a model in which two countries trade agricultural and manufactured commodities. The manufactured-goods sector produces with increasing returns to scale under conditions of monopolistic competition. It is shown that an increase in land endowment (or an increase in agricultural productivity) can have negative welfare implications for both countries. This outcome can result under three different scenarios: asymmetries across countries, i.e. a North-South model, a neoclassical labor market in the home country's instead of a Lewisian market, and alternative utility functions. |
| Keywords: | international trade, labor surplus economy, land expansion, monopolistic competition, North-South model. |
| JEL: | F12 J61 O15 O18 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ros:wpaper:53&r=upt |
| By: | Guido Travaglini (Università 'La Sapienza' Roma) |
| Abstract: | In this paper a Cobb-Douglas utility function is introduced and solved for a dynamic equation of property crime supply and its determinants, namely deterrents and income. Thereafter, all variables are empirically tested, by means of a simultaneous equations model, for the sign and magnitude of their mutual relationships in a panel of Italy and its two economically and culturally different areas, the North and the South. The period scrutinized is 1980-95 and the results obtained widely differ among the two. When appropriately modeled and instrumented, in fact, property crime is found to react to police and criminal justice deterrence, and also to incomes, with different parameter magnitudes and significance. The same diversity applies to the parameters related to deterrence, flawed in quite a few cases by scarce law enforcement and productivity, and to those related to local incomes, which still reflect for the South a tendency of crime to substitute for legal activities. |
| Keywords: | Models with Panel Data, Illegal Behavior and the Enforcement of Law |
| JEL: | C33 K42 |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0512001&r=upt |