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on Utility Models and Prospect Theories |
| By: | Zvi Safra (Tel Aviv University); Uzi Segal (Boston College) |
| Abstract: | Rabin proved that a low level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. Rabin's arguments strongly depend on expected utility theory, but we show that similar arguments apply to almost all non-expected utility theories. |
| Date: | 2006–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:645&r=upt |
| By: | Zvi Safra (Tel Aviv University); Uzi Segal (Boston College) |
| Abstract: | Rabin proved that a low level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. Rabin's arguments strongly depend on expected utility theory, but we show that similar arguments apply to almost all non-expected utility theories and even to theories dealing with uncertainty. The set of restrictions needed in order to avoid such absurd behavior may suggest that the assumption of universality of preferences over final wealth is too strong. |
| Date: | 2005–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:633&r=upt |
| By: | Chris van Klaveren; Bernard M.S. van Praag; Henriette Maassen van den Brink |
| 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 function. 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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1753&r=upt |
| By: | Maarten Vendrik (Maastricht University and IZA Bonn); Geert Woltjer (Maastricht University) |
| 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: | life satisfaction, relative income, value function, loss aversion, social participation |
| JEL: | I31 D6 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2218&r=upt |
| By: | Sims, Christopher A. |
| Abstract: | The literature applying information-theoretic ideas to economics has so far considered only Gaussian uncertainty. Ex post Gaussian uncertainty can be justified as optimal when the associated optimization problem is linear-quadratic, but the literature has often assumed Gaussian uncertainty even where it cannot be justified as optimal. This paper considers a simple two-period optimal saving problem with a Shannon capacity constraint and non-quadratic utility. It derives an optimal ex post probability density for wealth in two leading cases (log and linear utility) and lays out a general approach for handling other cases numerically. It displays and discusses numerical solutions for other utility functions, and considers the feasibility of extending this paper’s approaches to general non-LQ dynamic programming problems. The introduction of the paper discusses approaches that have been taken in the existing literature to applying Shannon capacity to economic modeling, making criticisms and suggesting promising directions for further progress. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4228&r=upt |
| By: | Thibault Gajdos (CREST - Centre de Recherche en Économie et Statistique - [INSEE] - [ École Nationale de la Statistique et de l'Administration Économique]); Jean-Christophe Vergnaud (EUREQUA - Equipe de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I]); Jean-Marc Tallon (EUREQUA - Equipe de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | We develop an axiomatic approach to decision under uncertainty that explicitly takes into account the information available to the decision maker. The information is described by a set of priors and a reference prior. We define a notion of imprecision for this informational setting and show that a decision maker who is averse to information imprecision maximizes the minimum expected utility computed with respect to a subset of the set of initially given priors. The extent to which this set is reduced can be seen as a measure of imprecision aversion. This approach thus allows a lot of flexibility in modelling the decision maker attitude towards imprecision. In contrast, applying<br />Gilboa-Schmeidler [1989] maxmin criterion to the initial set of priors amounts to assuming extreme pessimism. |
| Keywords: | Uncertainty, Decision, Multiple Priors |
| Date: | 2006–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00086021_v1&r=upt |
| By: | Nicholas Barberis; Ming Huang |
| Abstract: | We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and stable risk-free rate, even when consumption growth is smooth and only weakly correlated with the stock market. Moreover, they can do so for parameter values that correspond to sensible attitudes to independent monetary gambles. We conclude by suggesting some possible directions for future research. |
| JEL: | G11 G12 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12378&r=upt |
| By: | Christian Holzner; Volker Meier; Martin Werding |
| Abstract: | The impact of a stronger work requirement for welfare recipients in a workfare program is studied in an efficiency wage model where a representative firm chooses its level of monitoring activities. A stricter workfare policy raises employment and monitoring activities. It typically increases profits and reduces the tax rate. The impact on the net wage is ambiguous. Utility levels of employed workers and welfare recipients may increase even if the net wage declines. The utility differential between these two groups of workers shrinks. |
| Keywords: | workfare, welfare, efficiency wages, monitoring |
| JEL: | H53 J41 J60 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1749&r=upt |
| By: | Thibault Gajdos (CREST - Centre de Recherche en Économie et Statistique - [INSEE] - [ École Nationale de la Statistique et de l'Administration Économique]) |
| Abstract: | Since the order generated by the Lorenz criterion is partial, it is a natural question to wonder how to extend this order. Most of the literature that is concerned with that question focuses on local changes in the income distribution. We follow a different approach, and define uniform $\alpha$-spreads, which are global changes in the income distribution. We give necessary and sufficient conditions for an Expected Utility or Rank-Dependent Expected Utility maximizer to respect the principle of transfers and to be favorable to uniform $\alpha$-spreads. Finally, we apply these results to inequality indices. |
| Keywords: | Inequality measures, Intersecting Lorenz Curves, Spreads |
| Date: | 2006–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00086028_v1&r=upt |
| By: | Thibault Gajdos (EUREQUA - Equipe de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I]); Alain Chateauneuf (CERMSEM - CEntre de Recherche de Mathématiques, Statistique et Économie Mathématique - [Université Panthéon-Sorbonne - Paris I]); Pierre-Henry Wilthien (CERMSEM - CEntre de Recherche de Mathématiques, Statistique et Économie Mathématique - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | We reconsider the principles of diminishing transfer (introduced by Kolm [1976]) and dual diminishing transfer (introduced by Mehran [1976]). It appears that if a Rank Dependent Expected Utility (RDEU) maximizer respects the principle of diminishing (resp. dual diminishing) transfer, then he behaves in accordance with the Expected Utility model (resp. Yaari's dual model).<br />This leads us to define the principle of strong diminishing transfer, which is a combination of the principles of diminishing and dual diminishing transfer. We give necessary conditions for a RDEU maximizer to respect this principle.<br /><br />These results are applied to the problem of inequality measurement. |
| Keywords: | Inequality Measurement, Principle of Diminishing Transfers |
| Date: | 2006–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00085936_v1&r=upt |
| By: | Kocherlakota, Narayana R.; Pistaferri, Luigi |
| Abstract: | In this paper, we consider a dynamic economy in which the agents in the economy are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the ãth moment of the consumption distribution, where ã is the coefficient of relative risk aversion. We use data from the consumer expenditure survey (CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4223&r=upt |
| By: | Jacob L. Vigdor |
| Abstract: | Why do voters at the lower end of the socioeconomic spectrum support political candidates who generally disfavor redistributive policies? Existing explanations often presume that voters are explicitly acting in opposition to their economic self-interest, or that they hold persistently optimistic expectations regarding the probability of moving into the upper ranks of the income distribution. This paper provides an alternative economic explanation. When voters evaluate their well-being by making relative utility comparisons, support for redistribution depends not only on absolute income but on one's status relative to a reference group. When reference groups are defined geographically, support depends on exposure to higher-income neighbors. The predictions of the model are supported by empirical evidence drawn from county-level election returns in 1980 and 2000, and by individual-level polling data following the 2000 election. |
| JEL: | D31 D72 H31 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12371&r=upt |
| By: | Uzi Segal (Boston College); Alex Stein (Benjamin N. Cardoso School of Law) |
| Abstract: | This is the first article to examine the effects of ambiguity aversion on the criminal process. Ambiguity aversion is a person’s rational attitude towards probability's indeterminacy. When a person is averse towards such ambiguities, he increases the probability of the unfavorable outcome to reflect that fear. This observation is particularly true about a criminal defendant who faces a jury trial. Neither the defendant nor the prosecution knows whether the jury will convict the defendant. Their best estimation relies on a highly generalized probability that attaches to a broad category of similar cases. The prosecution, as a repeat player, is predominantly interested in the conviction rate that it achieves over a long series of cases. It therefore can depend on this general probability as an adequate predictor of this rate. The defendant only cares about his individual case and cannot depend on this general probability. From the defendant's perspective, his individual probability of conviction is ambiguous. The defendant consequently increases this probability to reflect his fear of that ambiguity. Because most defendants are ambiguity-averse, while the prosecution is not, the criminal process systematically involves and is thoroughly affected by asymmetric ambiguity-aversion. |
| Date: | 2005–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:615&r=upt |
| By: | Thibault Gajdos (EUREQUA - Equipe de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | La recherche d'une mesure objective des inégalités, sur le modèle des mesures des grandeurs physiques est vaine : la mesure des inégalités dépend, en effet, de l'opinion des membres de la société en matière de justice distributive. Il est donc souhaitable que les opinions qui sous-tendent les mesures des inégalités soient aussi explicites que possible. Nous nous attachons, dans cette note, à présenter et à discuter en détail les conséquences des opinions sur lesquelles est susceptible de se fonder une mesure des inégalités.<br />Nous distinguons deux classes d'indices d'inégalités, selon qu'ils respectent, ou non, l'axiome d'indépendance. Les premiers sont les indices à la Atkinson-Kolm-Sen, et s'inscrivent dans le cadre du modèle d'espérance d'utilité de von Neumann et Morgenstern. Les second sont les indices de Gini, Gini généralisés et Gini super-généralisés, et s'inscrivent dans le cadre du modèle d'espérance d'utilité dépendant du rang de Yaari ou de Quiggin. <br />Les indices de Gini et ses généralisations permettent une description beaucoup plus fine des opinions en matière de justice redistributive que les indices à la Atkinson-Kolm-Sen, puisqu'ils reposent sur des axiomes plus faibles. Ces indices semblent donc particulièrement bien adaptés pour évaluer l'adéquation des politiques redistributives à des objectifs en matière de justice<br />sociale. |
| Keywords: | mesure des inégalités, attitude à l'égard des inégalités, modèle d'espérance d'utilité dépendant du rang |
| Date: | 2006–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00086039_v1&r=upt |