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on Utility Models and Prospect Theories |
| By: | Antoni Bosch; Joaquim Silvestre |
| Abstract: | We experimentally question the assertion of Prospect Theory that people display risk attraction in choices involving high-probability losses. Indeed, our experimental participants tend to avoid fair risks for large (up to € 90), high-probability (80%) losses. Our research hinges on a novel experimental method designed to alleviate the house-money bias that pervades experiments with real (not hypothetical) loses. Our results vindicate Daniel Bernoulli’s view that risk aversion is the dominant attitude, But, contrary to the Bernoulli-inspired canonical expected utility theory, we do find frequent risk attraction for small amounts of money at stake. In any event, we attempt neither to test expected utility versus nonexpected utility theories, nor to contribute to the important literature that estimates value and weighting functions. The question that we ask is more basic, namely: do people display risk aversion when facing large losses, or large gains? And, at the risk of oversimplifying, our answer is yes. |
| Keywords: | Losses, Risk Attraction, Risk Aversion, Experiments, Prospect Theory, Bernoulli, Kahneman, Tversky |
| JEL: | C91 D81 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:932&r=upt |
| By: | Daniel Castellanos |
| Abstract: | In this article, we do two things: first, we present an alternative and simplified proof of the known fact that cardinal individual utility functions are necessary, but not sufficient, and that interpersonal comparability is sufficient, but not necessary, for the construction of a social welfare function. This means that Arrow’s impossibility theorem is simply a consequence of forcing the individual utility functions to be ordinal. And second, based on this proof, this article establishes two necessary conditions for the adequate definition of a social choice problem. It is shown that, if these two conditions are satisfied, a number of desirable properties for a social choice are satisfied, including transitivity. This means that Condorcet’s paradox is simply the result of a social choice problem that is not well defined. |
| Date: | 2005–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:col:001049:002383&r=upt |
| By: | Minh Ha-Duong (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées) |
| Abstract: | Cette communication définit quelques mots au sens où les entendent les économistes étudiant l'incertitude, les politiques climatiques et la modélisation intégrée. La première partie expose deux exemples pédagogiques définissant d'abord risque, incertitude, surprise, stratégie contingente. Pour l'incertitude qui n'est pas du risque, les probabilités subjectives et les critères safety first avec la valeur exposée au risque, les possibilités à la Shackle-Zadeh, le modèle de Dempster-Shafer ainsi que les probabilités imprécises dites aussi non-additives sont discutés. La seconde partie expose l'approche de l'incertitude dans les modèles: analyse de risque, sensitivité, Monte-Carlo et scénarios, puis analyse des bornes et viabilité et enfin l'optimisation dynamique stochastique. |
| Keywords: | Risque; Incertitude; Utilité; Probabilités imprécises; Modèles intégrés; Changement climatique. |
| Date: | 2006–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00008510_v1&r=upt |
| By: | Daniel Hernandez–Hernandez; Alexander Schied |
| Abstract: | We give an explicit PDE characterization for the solution of a robust utility maximization problem in an incomplete market model, whose volatility, interest rate process, and long-term trend are driven by an external stochastic factor process. The robust utility functional is defined in terms of a HARA utility function with negative risk aversion and a dynamically consistent coherent risk measure, which allows for model uncertainty in the distributions of both the asset price dynamics and the factor process. Our method combines two recent advances in the theory of optimal investments: the general duality theory for robust utility maximization and the stochastic control approach to the dual problem of determining optimal martingale measures. |
| Keywords: | optimal investment, model uncertainty, incomplete markets, stochastic volatility, coherent risk measures, optimal control, convex duality |
| JEL: | G11 D81 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-007&r=upt |
| By: | Michael Breuer (Socioeconomic Institute, University of Zurich) |
| Abstract: | The standard solution to adverse selection is the separating equilibrium introduced by Rothschild and Stiglitz. Usually, the Rothschild-Stiglitz argument is developed in a model that allows for two states of the world only. In this paper adverse selection is dis-cussed for continuous loss distributions. This gives rise to the new problem of finding the proper form of an insurance contract to impose partial insurance of the low risks. This paper contributes to the discussion on optimal insurance. It analyzes two basic forms of insurance contracts: A contract with a deductible and a contract imposing a positive co-insurance rate. Since high risks can always self-reveal themselves as high risks and buy the optimal insurance contract at high risks’ premiums the Pareto-superior insurance contract is the one that leaves the low risks with higher expected utility while deterring high risks from joining the contract that is designed for low risks. The deductible contract turns out to be superior if premiums contain a sufficiently high loading. |
| Keywords: | Insurance, Adverse Selection, Deductible, Co-Insurance |
| JEL: | D81 D82 D62 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0401&r=upt |
| By: | Michael Breuer (Socioeconomic Institute, University of Zurich) |
| Abstract: | In the literature on optimal indemnity schedules, indemnities are usually restricted to be non-negative. Gollier (1987) shows that this constraint might well bind: insured could get higher expected utility if insurance contracts would allow payments from the insured to the insurer at some losses. However, due to the insurers’ cost function Gollier supposes, the optimal insurance contract he derives underestimates the relevance of the non-negativity constraint on indemnities. This paper extends Gollier’s findings by allowing for negative indemnity payments for a broader class of insurers’ cost functions. |
| Keywords: | Insurance, Indemnity, Deductible, Co-Insurance |
| JEL: | D80 D81 D89 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0406&r=upt |
| By: | Johannes Schwarze (University of Bamberg); Rainer Winkelmann (Socioeconomic Institute, University of Zurich) |
| Abstract: | Much progress has been made in recent years on developing and applying a direct measure of utility using survey questions on subjective well-being. In this paper we explore whether this new type of measurement can be fruitfully applied to the study of interdependent utility in general, and altruism between parents and adult children who moved away from home in particular. We introduce an appropriate econometric methodology and, using data from the German SocioEconomic Panel for the years 2000-2004, find that the parents’ self-reported happiness depends positively on the happiness of their adult children. A one standard deviation move in the child’s happiness has the same effect as a 45 percent move in household income. |
| Keywords: | utility interdependence, sympathy, extended family, fixed effects |
| JEL: | D6 D64 C25 J10 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0503&r=upt |
| By: | Stefan Boes (Socioeconomic Institute, University of Zurich); Markus Lipp (Socioeconomic Institute, University of Zurich); Rainer Winkelmann (Socioeconomic Institute, University of Zurich) |
| Abstract: | Much progress has been made in recent years in developing and applying a direct measure of utility using survey questions on satisfaction with income and with life in general. In this paper we apply this new type of measurement to the study of money illusion. Using data from the German Socio-Economic Panel for the years 1993 to 2003, we cannot reject the hypothesis of no money illusion. |
| Keywords: | North-South, cost-of-living, subjective well-being, fixed effects |
| JEL: | I31 D12 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0514&r=upt |
| By: | Francesco Menoncin |
| Abstract: | A longevity bond pays coupons which are proportional to the survival rate of a given population. In such a way the longevity risk becomes hedgeable on the financial market. In our model there are: (i) a longevity bond as a derivative on the population survival rate, (ii) a bond as a derivative on the stochastic instantaneously riskless interest rate, and (iii) a stock. The investor maximizes the expected (CRRA) utility of his intertemporal consumption. In such a framework we demonstrate that the amount of wealth invested in the longevity bond reduces the portfolio weight of the bond without affecting neither the weight of the stock nor the weight of the riskless asset. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:0601&r=upt |