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on Utility Models and Prospect Theories |
| By: | Marco Caliendo (DIW Berlin, IAB Nuremberg and IZA Bonn); Frank M. Fossen (DIW Berlin); Alexander S. Kritikos (European University Viadrina, Frankfurt (Oder), GfA and IAB Nuremberg) |
| Abstract: | The influence of risk aversion on the decision to become self-employed is a much discussed topic in the entrepreneurial literature. Conventional wisdom asserts that the role model of an entrepreneur requires to make risky decisions in uncertain environments and hence that more risk-averse individuals are less likely to become an entrepreneur. Empirical tests of this assumption are scarce however, mainly because reliable measures for risk-aversion are not available. We base our analysis on the most recent waves of the German Socio-Economic Panel (SOEP) which allow us to use experimentally-validated measures of risk attitudes. Most importantly and in contrast to previous research, we are able to examine whether the decision of starting a business is influenced by objectively measurable risk attitudes at the time when this decision is made. Our results show that in general individuals with lower risk aversion are more likely to become self-employed. Sensitivity analysis reveals, however, that this is true only for people coming out of regular employment, whereas for individuals coming out of unemployment or inactivity risk attitudes do not seem to play a role in the decision process. |
| Keywords: | risk attitudes, entrepreneurship, self-employment |
| JEL: | D81 J23 M13 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2168&r=upt |
| By: | Claudia Senik |
| Abstract: | This paper is dedicated to the empirical exploration of the welfare effect of expectations and progress "per se". Using ten waves of the "Russian Longitudinal Monitoring Survey", a panel household survey rich in subjective variables, the analysis suggests that for a given total stock of inter-temporal consumption, agents have a strong “taste for improvement” i.e. they are more satisfied with an increasing time-profile of consumption. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2006-12&r=upt |
| By: | Eric Johnson (Columbia Business School, Columbia University); Simon Gaechter (University of Nottingham); Andreas Herrmann (Zentrum for Business Metrics, St.Gallen Universitaet) |
| Abstract: | Loss aversion, the fact that losses have a greater impact than gains, is a fundamental property of behavioral accounts of choice. In this paper, we suggest four possible characterizations of the relative impact of losses and gains: (1) It could be a constant, such as the much cited value of 2, as in losses have twice the impact of gains. (2) It could be a systematic individual difference, with some individuals more or less loss aversion, (3) it could be a property of the attribute, or (4) a property of the different processes used to construct selling and buying prices. We examine the behavior of a large sample of auto buyers using an experiment which allows us to measure loss aversion, at the individual level for several different attributes. A set of hierarchical linear models shows that to understand loss aversion, one must consider the process used to construct prices. Interestingly, we show that knowledge of the attribute lowers loss aversion and that age and attribute importance increases loss aversion. |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2006-02&r=upt |
| By: | Joao Correia-da-Silva (CEMPRE, Faculdade de Economia, Universidade do Porto); Carlos Hervés-Beloso (RGEA. Facultad de Económicas. Universidade de Vigo.) |
| Abstract: | In an economy with private information, we introduce the notion of objects of choice as lists of bundles out of which the market selects one for delivery. This leads to an extension of the model of Arrow-Debreu that is used to study ex-ante trade with private state verification. The model does not require agents to have complete information about the space of states, being suited to a context of Knightian uncertainty. Under the assumption that agents are prudent, equilibrium is characterized by the fact that agents consume bundles with the same utility in states that they do not distinguish. |
| Keywords: | General equilibrium, Private information, Incomplete information, Knightian uncertainty, Ambiguity, Uncertain delivery, Lists of bundles. |
| JEL: | C62 D51 D82 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:216&r=upt |
| By: | Sebastian Kranz |
| Abstract: | This paper analyses competition of moral norms and institutions in a society where a fixed share of people unconditionally complies with norms and the remaining people act selfishly. Whether a person is a norm-complier or selfish is private knowledge. A model of voting-by-feet shows that those norms and institutions arise that maximize expected utility of norm-compliers, taken into account selfish players' behavior. Such complier optimal norms lead to a simple behavioral model that, when combined with preferences for equitable outcomes, is in line with the relevant stylized facts from a wide range of economic experiments, like reciprocal behavior, costly punishment, the role of intentions, giving in dictator games and concerns for social efficiency. The paper contributes to the literature on voting-by-feet, institutional design, ethics and social preferences. |
| Keywords: | moral norms, social preferences, fairness, reciprocity, rule utilitarianism, voting-by-feet, farsighted-stability, cultural evolution, golden rule, social norms |
| JEL: | A13 C7 D02 D63 D64 D71 D8 Z13 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse11_2006&r=upt |
| By: | J. Bonke; M. Deding; M. Lausten |
| Abstract: | Time and money are basic commodities in the utility function and are substitutes in real terms. To a certain extent, having time and money is a matter of either/or, depending on individual preferences and budget constraints. However, satisfaction with time and satisfaction with money are typically complements, i.e., individuals tend to be equally satisfied with both domains. In this paper, we provide an explanation for this apparent paradox through the analysis of the simultaneous determination of economic satisfaction and leisure satisfaction. We test some hypotheses, including the hypothesis that leisure satisfaction depends on both the quantity and quality of leisure-where quality is proxied by good intensiveness and social intensiveness. Our results show that both the quantity and the quality of leisure are important determinants of leisure satisfaction, and, since having money contributes to the quality of leisure, this explains the empirical findings of the satisfactions being complementary at the same time as the domains are substitutes. Interestingly, gender matters. Intra-household effects and especially individual characteristics are more pronounced for women than for men for both domain satisfactions. Additionally, good intensiveness is more important for men (e.g., housing conditions), whereas social intensiveness is more important for women (e.g., the presence of children and participation in leisure-time activities). |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_451&r=upt |
| By: | Miroslav Misina |
| Abstract: | Changes in investors' risk appetite have been used to explain a variety of phenomena in asset markets. And yet, popular indicators of changes in risk appetite typically have scant foundation in theory, and give contradictory signals in practice. The question is which popular indicator, if any, captures these changes. Kumar and Persaud (2002) offer an intuitively appealing argument regarding the effects of changes in risk appetite on asset prices in a portfolio, and Misina (2003) establishes the conditions under which these effects will be present. The author proposes a method that empirically implements these conditions and thus ensures that the resulting index can identify changes in risk appetite in the data. This index is then used to assess other risk appetite indexes used in practice. An example illustrates how the index can be used to help interpret price movements in foreign exchange markets. |
| Keywords: | Economic models; Financial markets |
| JEL: | G12 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-16&r=upt |
| By: | Alicia H. Munnell (Center for Retirement Research); Anthony Webb (Center for Retirement Research); Luke Delorme (Center for Retirement Research) |
| Abstract: | Americans weaned on post-war affluence have come to expect an extended period of leisure at the end of their work life. And, indeed, the majority of today’s retirees are able to afford a decent retirement. However, this group is living in a “golden age” that will fade as Baby Boomers and Generation Xers reach traditional retirement ages in the coming decades. This gloomy prediction reflects the trend towards longer retirements and likely declines in retirement incomes relative to pre-retirement earnings — known as replacement rates. Because many Americans appear unaware of these disquieting trends, the Center for Retirement Research at Boston College has developed the National Retirement Risk Index. The Index measures the share of working-age households who are at risk of being unable to maintain their pre-retirement standard of living in retirement. The Index shows that, even if people retire at age 65 and households annuitize all their wealth including the receipts from reverse mortgages on their homes, 43 percent will be at risk. But the situation is not hopeless — if people choose to work longer — even just two years — and save 3 percent more, they can substantially improve the outlook for their retirement security. |
| Keywords: | national retirement risk index, retirement, standard of living |
| Date: | 2006–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:crr:issbrf:ib48&r=upt |