nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2006‒09‒11
three papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Economic uncertainty principle? By Alexander Harin
  2. What Determines the Shape of the Probability Weighting Function? By Helga Fehr-Duda; Marc Schürer; Renate Schubert
  3. A Note on the Risk Behavior and Death of Homo Economicus By Johansson-Stenman, Olof

  1. By: Alexander Harin (MODERN UNIVERSITY FOR THE HUMANITIES - Modern University for the Humanities - [Modern University for the Humanities])
    Abstract: The economic principle of (hidden) uncertainty is presented. New probability formulas are offered. Examples of solutions of three types of fundamental problems are reviewed.
    Keywords: uncertainty, risk, hidden causes
    Date: 2006–09–03
  2. By: Helga Fehr-Duda (Institute of Economic Research, Swiss Federal Institute of Technology Zurich (ETH)); Marc Schürer (Institute of Economic Research, Swiss Federal Institute of Technology Zurich (ETH)); Renate Schubert (Institute of Economic Research, Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: When valuing risky prospects, people typically overweight small probabilities and underweight medium and large probabilities, but there is vast heterogeneity in individual behavior. We explore the relationship between person-specific probability weights, estimated from investment decisions in a laboratory experiment, and personal characteristics. We find considerable interaction effects with gender. While women’s probability weighting is strongly and significantly susceptible to mood states, men’s is not. Moreover, we show that cheerful and optimistic people weight probabilities of investment gains more favorably than do pessimistic people. People who calculate expected payoffs are less prone to probability distortions than those who do not use a lottery’s expected value as a decision criterion. None of the factors studied impact subjects’ valuations of monetary outcomes.
    Keywords: Probability Weighting Function, Prospect Theory, Risk Aversion, Gender Differences
    Date: 2006–08
  3. By: Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Recent papers by Cox and Sadiraj (2006) and Rubinstein (2006) have pointed out that expected utility theory is more general than has sometimes been acknowledged, and can hence not be refuted as easily by means of experiments. While acknowledging this fact, this note nevertheless demonstrates that typical risk experimental results are impossible to reconcile with conventional dynamic consumption theory under risk, where people are time consistent and integrate all sources of income perfectly. <p>
    Keywords: The Rabin critique; expected utility of income; expected utility of final wealth; dynamic consumption theory; risk experiments; imperfect income integration; prospect theory
    JEL: D81 D91
    Date: 2006–08–01

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