nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2006‒05‒13
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Expected Multi-Utility Theorems with Topological Continuity Axioms By Evren Özgür
  2. Empirical Estimation Results of a Collective Household Time Allocation Model By Chris van Klaveren; Bernard van Praag; Henriette Maassen van den Brink
  3. Implementing Cooperative Solution Concepts: a Generalized Bidding Approach By Yuan Ju; David Wettstein
  4. Attitudes to economic risk taking, sensation seeking and values of economists specializing in finance By Sjöberg, Lennart; Engelberg, Elisabeth
  5. The CAPM and the risk appetite index; theoretical differences and empirical similarities By Marcello Pericoli; Massimo Sbracia
  6. Willingness to Pay for Low Probability, Low Loss Hazard Insurance By John C. Whitehead

  1. By: Evren Özgür
    Date: 2005
  2. By: Chris van Klaveren (SCHOLAR, University of Amsterdam); Bernard van Praag (SCHOLAR, University of Amsterdam and IZA Bonn); Henriette Maassen van den Brink (SCHOLAR, University of Amsterdam)
    Abstract: In this paper an empirical model is developed where the collective household model is used as a basic framework to describe the time allocation problem. The collective model views household behavior as the outcome of maximizing a household utility function which is a weighted sum of the utility functions of the male and the female. The empirical research that has been done is mainly focused on testing and refuting the unitary model. Moreover, in the bulk of time allocation literature the main accent still lies on the development of theory. The novelty of this paper is that we empirically estimate the two individual utility functions and the household power weight distribution, which is parameterized per household. The model is estimated on a sub-sample of the British Household Panel Survey, consisting of two-earner households. The empirical results suggest that: (1) Given that the weight distribution is wage dependent, preferences of males and females differ, which rejects the unitary model; (2) The power differences are mainly explained by differences in the ratio of the partners' hourly wages; (3) Although there are significant individual variations on average the power distribution in two-earner families is about even; (4) The male tends to be marginally more productive in performing household tasks than the female (5) The preference for total household production is influenced by family size for the female but not for the male (6) Both males and females have a backward bending labor supply curve.
    Keywords: collective household models, labor supply, intra-household, time allocation
    JEL: D12 D13 J22
    Date: 2006–04
  3. By: Yuan Ju (Keele University, Centre for Economic Research and School of Economic and Management Studies); David Wettstein (Department of Economics, Ben-Gurion University of the Negev)
    Abstract: This paper provides a framework for implementing and comparing several solution concepts for transferable utility cooperative games.We construct bidding mechanisms where players bid for the role of the proposer. The mechanisms differ in the power awarded to the proposer. The Shapley, consensus and equal surplus values are implemented in subgame perfect equilibrium outcomes as power shifts away from the proposer to the rest of the players. Moreover, an alternative informational structure where these solution concepts can be implemented without imposing any conditions of the transferable utility game is discussed as well.
    Keywords: Implementation; bidding mechanism; Shapley value; consensus value; equal surplus value.
    JEL: C71 C72 D62
    Date: 2006–04
  4. By: Sjöberg, Lennart (Center for Risk Research); Engelberg, Elisabeth (Center for Risk Research)
    Abstract: Financial decision making rarely follows models derived from economic theory which postulate that people are rational economic actors. Psychological alternatives abound. The Tversky-Kahneman heuristics approach is currently dominating, but it needs to be complemented with emotional and personality factors, since cognitive limitations by no means provide exhaustive explanations of the psychology of decision making. In this paper, attitudes to financial risk taking and gambling are related to sensation seeking, emotional intelligence, the perceived importance of money (money concern), and over-arching values, in groups of students of financial economics (N=93). Most of the students planned a career in finance. Comparative data were collected for a group of non-students. Data on values were also available from a random sample of the population for a comparison. It was found that a positive attitude to economic risk taking and gambling behavior were associated with a high level of sensation seeking, a lower level of money concern, and giving low priority to altruistic values concerning peace and the environment. The subgroup of participants planning a career in finance showed an even more pronounced interest in gambling and a lower level of emotional intelligence.
    Keywords: Decision making; finance; risk attitude; financial advice
    Date: 2006–03–31
  5. By: Marcello Pericoli (Bank of Italy, Economic Research Department); Massimo Sbracia (Bank of Italy, Economic Research Department)
    Abstract: This paper analyzes the Risk Appetite Index (RAI), a measure of investors’ risk aversion proposed by Kumar and Persaud (2001, 2002). We show that the RAI distinguishes between risk and risk aversion only under theoretically restrictive assumptions on the distribution of returns and the shocks affecting assets’ riskiness. However, by comparing the RAI with a measure of risk aversion derived from the CAPM — a model that does not require those restrictive assumptions — we find that estimates are surprisingly similar. We explain this result by proving that, under a certain condition, the RAI can approximate the risk aversion parameter of a CAPM. This occurs if the ratio between the variance of the returns on assets and the variance of the riskiness of assets is sufficiently small—a condition that is met in our sample.
    Keywords: CAPM, risk aversion
    JEL: G11 G12
    Date: 2006–03
  6. By: John C. Whitehead
    Abstract: We estimate the willingness to pay for low probability, low loss hazard insurance with the contingent valuation method. The application is to household hurricane evacuation cost insurance – a new product for which there is currently no market. We find that a majority of respondents would not purchase the product at even the lowest price. In general, respondents are rational in response to the probability and costs of a evacuation. Respondents are not likely to pay anything for evacuation cost insurance.
    Date: 2006

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