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on Utility Models and Prospect Theories |
| By: | Masamitsu Ohnishi (Graduate School of Economics, Osaka University); Yusuke Osaki (JSPS Research Fellow) |
| Abstract: | This note determines a sufficient condition on (von Neumann-Morgenstern) utility functions to preserve (reserve) comparative risk aversion under general background risks. Our condition is weaker than the one determined by Nachman (1982, Journal of Economic Theory). Nachmanfs condition requires the monotonicity in the global sense, in other hand our condition only requires it in the local sense. And this generalization may make the condition on utility functions to hold the desirable property consisitent with the recent empirical observation. |
| Keywords: | Background risk, comparative risk aversion, single crossing condition. |
| JEL: | D81 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0616&r=upt |
| By: | Yusuke Osaki (JSPS Research Fellow) |
| Abstract: | This note gives sufficient conditions of cross risk vulnerability introduced by Malevergne and Rey (2005), which is the equivalent condition to guarantee that an unfair non-monetary background risk makes decision makers more risk averse. The sufficient conditions determined by this note expand the results for univariate utility function into bivariate utility functions. |
| Keywords: | Background risk, cross risk vulnerabiilty, risk aversion. |
| JEL: | D81 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0617&r=upt |
| By: | Chris van Klaveren (Universiteit van Amsterdam); Bernard M.S. van Praag (Universiteit van Amsterdam); Henriette Maassen van den Brink (Universiteit van Amsterdam) |
| Abstract: | Although the number of immigrant households in the Netherlands is substantial, the labor supply choices of this group are usually neglected in empirical studies because these households are usually under-sampled. We use a stratified sample of Turkish, Surinamese/Antillean and Dutch households that enables us to discuss how two-earner households allocate their time to different activities. In order to do so, we empirically estimate a collective household labor supply model. The main findings are that: (1) Leisure and household income are the most important variables in the utility function of the male; (2) Leisure, total household production and total household production interacted with family size are important variables in the utility function of the female. The latter two are especially important for Turkish and Surinamese/Antillean females; (3) The utility of Turkish and Dutch males weighs slightly more than the utility of the partner in the household utility f! unction. For Surinamese/Antillean families we find the opposite; (4) Utility weighting depends on the presence of children and on the hourly wage rates of both partners; (5) The labor supply curve is forward bending for both male and female in terms of their own wage. The labor supply curve is backward bending for both male and female in terms of the partners wage. We find this for all household types; (7) The presence of (more) children reduces the hours of labor supplied by women and increases the number of hours supplied by men. |
| Keywords: | Collective household models; Labor supply; Intra-household; time allocation |
| JEL: | D12 D13 J22 |
| Date: | 2006–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060052&r=upt |
| By: | Marco Caliendo; Frank M. Fossen; Alexander S. Kritikos |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp600&r=upt |
| By: | Vendrik Maarten; Woltjer Geert (METEOR) |
| Abstract: | A central finding in happiness research is that a person’s income relative to the average income in her social reference group is more important for her life satisfaction than the absolute level of her income. This dependence of life satisfaction on relative income can be related to the reference dependence of the value function in Kahneman and Tversky’s (1979) prospect theory. In this paper we investigate whether the characteristics of the value function like concavity for gains, convexity for losses, and loss aversion apply to the dependence of life satisfaction on relative income. This is tested with a new measure for the reference income for a large German panel for the years 1984-2001. We find concavity of life satisfaction in positive relative income, but unexpectedly strongly significant concavity of life satisfaction in negative relative income as well. The latter result is shown to be robust to extreme distortions of the reported-life-satisfaction scale. It implies a rising marginal sensitivity of life satisfaction to more negative values of relative income, and hence loss aversion (in a wide sense). This may be explained in terms of increasing financial obstacles to social participation. |
| Keywords: | public economics ; |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2006026&r=upt |
| By: | Werner Güth; Gerlinde Fellner; Ev Martin |
| Abstract: | This experimental study investigates whether individuals prefer bounded rationality over rational choice theory when facing simple investment tasks. First, participants state some personal parameters that serve as an input to render a theoretical approach, namely satisficing or optimality, applicable. Then, they are guided through the decision making process where either ‘satisficing’ or ‘optimality’ is suggested and has to be implemented. The behavioral appeal of the two approaches is measured by the adjustments of personal parameters until accepting the investment decision suggested by theory. Additionally, a questionnaire is administered to elicit subjective contentment with the two approaches. |
| Keywords: | Theory absorption; Satisficing behavior; Portfolio selection |
| JEL: | C91 D81 G11 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-11&r=upt |
| By: | Ángel León (University of Alicante); Juan Nave (University of Castilla La Mancha); Gonzalo Rubio (University of the Basque Country) |
| Abstract: | We employ MIDAS (Mixed Data Sampling) to study the risk-expected return trade-off in several European stock indices. Using MIDAS, we report that, in most indices, there is a significant and positive relationship between risk and expected return. This strongly contrasts with the result we obtain when we employ both symmetric and asymmetric GARCH models for conditional variance. We also find that asymmetric specifications of the variance process within the MIDAS framework improve the relationship between risk and expected return. Finally, we introduce bivariate MIDAS and find some evidence of significant pricing of the hedging component for the intertemporal riskreturn trade-off. |
| Keywords: | Risk-return trade-off, hedging component, MIDAS, conditional variance |
| JEL: | G12 C22 |
| Date: | 2005–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200508&r=upt |