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on Utility Models and Prospect Theories |
| By: | Bosman, R.A.J; van Winden, Frans A.A.M. |
| Abstract: | We investigate a novel dynamic choice problem in an experiment where emotions are measured through self-reports. The choice problem concerns the investment of an amount of money in a safe option and a risky option when there is a 'global risk' of losing all earnings, from both options, including any return from the risky option. Our key finding is that global risk can reduce the amount invested in the risky option. This result cannot be explained by classical Expected Utility or by its main contenders Rank-Dependent Utility and Cumulative Prospect Theory. An explanation is offered by taking account of emotions, using the emotion data from the experiment and recent psychological findings. We also find that people invest less if own earnings are at stake, compared to money obtained as an endowment. |
| Keywords: | dynamic choice; emotions; global risk; investment; real effort |
| JEL: | A12 C91 D80 G11 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5451&r=upt |
| By: | Matthias Wrede |
| Abstract: | Several empirical studies provide evidence that their actual health state affects people’s attitudes towards health and medical care in hypothetical health states. In the tradition of behavioural economics this paper considers the actual health state as a point of reference and builds a model for studying the implications of this phenomenon on health insurance and on demand for medical care. It considers the insurance demand of different types of agents: naive individuals, individuals who are able to commit to medical care demand and sophisticated individuals. Furthermore, it raises the question of whether inconsistency of preferences reinforces or tones down moral hazard problems. |
| Keywords: | health insurance, medical care, health state, behavioural economics, prospect theory, time inconsistency |
| JEL: | D82 D91 G22 I11 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1634&r=upt |
| By: | Alois Stutzer; Bruno S. Frey |
| Abstract: | Neoclassical economic theory rules out systematic errors in consumption choice. According to the basic view, individuals know what they choose. They are able to predict how much utility an activity or a good produces for them now and in the future and they can maximize their utility. This implies that behavior reveals consistent preferences. This approach makes it impossible to detect and understand sub-optimal consumption decisions, due to problems of self-control and the misprediction of utility. We propose the economics of happiness as a methodological approach to study these phenomena. Based on proxy measures for experienced utility, it is, in principle, possible to directly address whether some observed behavior is sub-optimal and is therefore reducing a person’s well-being. We discuss recent evidence on smoking and eating habits, TV viewing and commuting choice. |
| Keywords: | adaptation, individual decision-making, revealed preference, self-control, subjective well-being, utility misprediction |
| JEL: | D00 D11 D12 D84 D91 I12 I31 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:267&r=upt |
| By: | Casamatta, Georges; Vellutini, Charles |
| Abstract: | Using a model of probabilistic voting, we analyse the impact of aid on the political equilibrium in the recipient country or region. We consider two kinds of politicians: the benevolent one is interested in promoting social welfare whereas the other one is clientelistic, his only goal being to maximize his chances of being elected. We find that the impact of aid on the political equilibrium and therefore on the quality of the policy (using the utilitarian social welfare as a benchmark) in the recipient country ultimately depends on the value of the elasticity of marginal consumption, which governs how the sensitivity of voters to a clientelistic allocation of resources (over a socially optimal one) varies with the level of consumption. When the elasticity is low, the probability that the clientelistic politician be elected increases and the expected policy outcome gets further away from the socially desirable policy set. This case of substitution of policy quality by aid can help to explain the poor performance of conditionality in improving policy. Perhaps more surprising is the opposite case, which arises for high values of the elasticity of marginal utility: an increase in aid worsens the clientelistic candidate’s election prospects and thus improves the expected policy set. |
| Keywords: | aid; clientelism; voting |
| JEL: | D72 H23 H41 H71 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5441&r=upt |