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on Utility Models and Prospect Theories |
| By: | Daniel Schunk (Mannheim Research Institute for the Economics of Aging (MEA)) |
| Abstract: | The curvature of utility functions varies between people. We suggest that there is a relationship between individual differences in preferred decision mode (intuition vs. deliberation) and the curvature of the individual utility function. If a person habitually prefers a deliberative mode, the utility function should be nearly linear, while it should be curved when a person prefers the intuitive mode. In this study the utility functions of the subjects were assessed using a lottery-based elicitation method and related to a measurement of the habitual mode preference for intuition and deliberation. Results confirm that people who prefer the deliberative mode have a utility function that is more linear than for people who prefer the intuitive mode. Our findings indicate a stronger affective bias of subjective values in intuitive than deliberate decision makers. While deliberative decision makers may have rather used the stated values, intuitive decision makers may have additionally integrated affective reactions towards the stimuli into the decision. |
| Date: | 2005–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:meawpa:05078&r=upt |
| By: | Chiaki Hara (Institute of Economic Research, Kyoto University); James Huang (Department of Accounting and Management, Lancaster University Management School); Christoph Kuzmics (MEDS, Kellogg School of Management, Northwestern University) |
| Abstract: | We study the representative consumerfs risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumerfs individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions. |
| Keywords: | Aggregation, heterogeneous consumers, absolute risk tolerance, mutual fund theorem. |
| JEL: | D51 D58 D81 G11 G12 G13 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:620&r=upt |
| By: | Ju,Yuan; Wettstein,David (Tilburg University, Center for Economic Research) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200642&r=upt |
| By: | Daniel Schunk; Joachim Winter (Mannheim Research Institute for the Economics of Aging (MEA)) |
| Abstract: | The existing evidence from laboratory experiments suggests that relatively simple heuristics describe observed search behavior better than the optimal stopping rule derived under risk neutrality. Such behavior could be generated by two entirely di®erent classes of decision rules: (i) rules that are optimal conditional on utility functions that depart from risk neutrality or (ii) heuristics that derive from limited cognitive processing capacities and satisfycing. In this paper, we develop and test search models that depart from the standard assumption of risk neutrality in order to distinguish these two possi- bilities. In our experiment, we present subjects not only with a standard search task, but also with a series of lottery tasks that serve to elicit the shape of their utility functions. We do not ¯nd a relationship between behavior in the search task and measures of risk aversion. Our data suggest, however, that loss aversion is important for explaining search behavior. |
| JEL: | D83 C91 |
| Date: | 2005–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:meawpa:05077&r=upt |
| By: | Alexander Ludwig; Alexander Zimper (Mannheim Research Institute for the Economics of Aging (MEA)) |
| Abstract: | We define pessimistic, respectively optimistic, investors as CEU (Choquet expected utility) decision makers who update their pessimistic, respectively optimistic, beliefs according to a pessimistic (Dempster-Shafer), respectively optimistic, update rule. This paper then demonstrates that, in contrast to optimistic investors, pessimistic investors may strictly prefer investing in an illiquid asset to investing in a liquid asset. Key to our result is the dynamic inconsistency of CEU decision making, implying that a CEU decision maker ex ante prefers a different strategy with respect to prematurely liquidating an uncertain long-term invest- ment project than after learning her liquidity needs. Investing in an illiquid asset then serves as a commitment device guaranteeing an ex ante favorable outcome. |
| JEL: | D81 G20 |
| Date: | 2004–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:meawpa:04060&r=upt |
| By: | Chiaki Hara (Institute of Economic Research, Kyoto University); James Huang (Department of Accounting and Management, Lancaster University Management School); Christoph Kuzmics (MEDS, Kellogg School of Management, Northwestern University) |
| Abstract: | In an exchange economy in which there is a complete set of markets for macroeconomic risks but no market for idiosyncratic risks, we consider how the efficient risk-sharing rules for the macroeconomic risk are affected by the heterogeneity in the consumersf risk attitudes and idiosyncratic risks. We provide sufficient conditions under which an idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), the determinant of the curvatures of the efficient risk-sharing rules. While the curvature of the risk-sharing rules at high consumption levels are governed by the consumersf risk attitudes, the curvature at low consumption levels depend not only on the risk attitudes but also on the lower tail distributions of the idiosyncratic risks. |
| Keywords: | Efficient risk-sharing rules, relative risk aversion, absolute risk tolerance, Inada condition, idiosyncratic risks, background risks, incomplete markets. |
| JEL: | D51 D58 D81 G11 G12 G13 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:621&r=upt |
| By: | A. Baujard(CREM - CNRS) |
| Abstract: | A focus on the information used in Bentham’s felicific calculus sheds new light on the contemporary debate in normative economics opposing non-welfarism to welfarism. As a utilitarian, Bentham is de facto welfarist on a moral sense. Unexpectedly, this study shows Bentham resorts to non-welfarist information in his calculus. Thus, technical non-welfarism is coherent with moral welfarism, and even, the former proves necessary not to betray utilitarian principles. To sustain this claim, we challenge a view opposing a “cardinal” to an “ordinal” calculus: these two calculi constitute different stages of a unique calculus; because of operational constraints, Bentham is bound to rely on proxies, hence on non-utility information. |
| Keywords: | Bentham, individual utility, utility calculus, utilitarianism, welfarism, non-welfarism, social welfare, technical welfarism, moral welfarism. |
| JEL: | B12 B31 D63 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:200606&r=upt |
| By: | David Schmidt (Federal Trade Commission, Bureau of Economics); Robert S. Shupp (Department of Economics, Ball State University); James Walker (Department of Economics, Indiana University, Bloomington, IN) |
| Abstract: | Across many forms of rent seeking contests, the impact of risk aversion on equilibrium play is indeterminate. We design an experiment to compare individuals’ decisions across three contests which are isomorphic under risk-neutrality, but are typically not isomorphic under other risk preferences. The pattern of individual play across our contests is not consistent with a Bayes-Nash equilibrium for any distribution of risk preferences. We show that replacing the Bayes-Nash equilibrium concept with the quantal response equilibrium, along with heterogeneous risk preferences can produce equilibrium patterns of play that are very similar to the patterns we observe. |
| Keywords: | rent seeking, experiments, risk aversion, game theory |
| JEL: | C72 C92 D72 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:bsu:wpaper:200506&r=upt |
| By: | Robert S. Shupp (Department of Economics, Ball State University); Arlington Williams (Department of Economics, Indiana University) |
| Abstract: | The risk preferences of three-person groups and individuals are compared using a non-sequential repeated-measures lottery experiment with $20 per-player win percentages varying from 10% to 90%. Analysis based on independent samples of certainty equivalent ratios (certainty equivalent/expected value) elicited using a maximum willingness-to-pay mechanism for fifty-two individuals and sixteen groups reveals that: 1) certainty equivalent ratios (CERs) vary significantly across lottery win percentages, 2) CER dispersion tends to decline as the lottery win percentage increases and is significantly smaller for groups than individuals in seven of the nine lotteries, 3) for the highest-risk lotteries, the average CERs submitted by groups are significantly smaller (more risk averse) than the average CERs submitted by individuals, 4) for the lowest-risk lotteries, the average CERs submitted by groups are approximately risk-neutral (CER=1) and somewhat larger than the average CERs submitted by individuals. |
| Keywords: | lab experiments, risk preferences, group decisions, certainty equivalents |
| JEL: | C91 C92 D80 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:bsu:wpaper:200301&r=upt |