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on Utility Models and Prospect Theories |
| By: | Louis Eeckhoudt; Béatrice Rey; Harris Schlesinger |
| Abstract: | Decisions under risk are often multidimensional, where the preferences of the decision maker depend on several attributes. For example, an individual might be concerned about both her level of wealth and the condition of her health. Many times the signs of successive cross derivatives of a utility function play an important role in these models. However, there has not been a simple and intuitive interpretation for the meaning of such derivatives. The purpose of this paper is to give such an interpretation. In particular, we provide an equivalence between the signs of these cross derivatives and individual preference within a particular class of simple lotteries. |
| Keywords: | correlation aversion, multivariate risk, prudence, risk aversion, temperance |
| JEL: | D81 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1796&r=upt |
| By: | Raphaël Giraud (CRESE - Centre de recherche sur les stratégies économiques - [Université de Franche-Comté], CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | We axiomatize a model of decision under objective ambiguity or imprecise risk. The decision maker forms a subjective (non necessarily additive) belief about<br />the likelihood of probability distributions and computes the average expected utility of a given act with respect to this second order belief. We show that ambiguity aversion like the one revealed by the Ellsberg paradox requires that second order beliefs be nonadditive. Some<br />special cases of the model are examined and different forms of ambiguity aversion are characterized. |
| Keywords: | Imprecise probabilistic information, second order beliefs, non-additive probabilities, ambiguity aversion, Ellsberg paradox, Choquet integral |
| Date: | 2006–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00102346_v1&r=upt |
| By: | Donald J. Brown (Cowles Foundation, Yale University); Rahul Deb (Dept. of Economics, Yale University); Marten H. Wegkamp (Dept. of Statistics, Florida State University) |
| Abstract: | A common stochastic restriction in econometric models separable in the latent variables is the assumption of stochastic independence between the unobserved and observed exogenous variables. Both simple and composite tests of this assumption are derived from properties of independence empirical processes and the consistency of these tests is established. As an application, we simulate estimation of a random quasilinear utility function, where we apply our tests of independence. |
| Keywords: | Cramer–von Mises distance, Empirical independence processes, Random utility models, Semiparametric econometric models, Specification test of independence |
| JEL: | C12 C13 C14 |
| Date: | 2003–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1395r&r=upt |
| By: | Claudia Biancotti (Bank of Italy) |
| Abstract: | This paper offers a micro-founded general definition of poverty set in the context of utility theory. Poverty and non-poverty are described as two structurally different types of local non-satiation: the former entails a strong need for further consumption and social marginalization, the latter is characterized by a weak need for further consumption and satisfactory adjustment to social expectations. Each of the states can be fully described by a separate technology of utility production. The model is tested on data from the Bank of Italy’s Survey of Household Income and Wealth; an indicator of self-reported economic satisfaction is regressed on yearly consumption of food and non-food commodities. The predictions of the model are confirmed in the case of food consumption, signalling the existence of physiological minima that are uniformly perceived by individuals. For non-food commodities, no significant change of regimes is found: welfare appears to be connected with needs that are less exposed to structural variation, possibly because they are not as urgent or objective as food-related ones. |
| Keywords: | Poverty |
| JEL: | I31 I32 D11 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_603_06&r=upt |
| By: | Sudhir A. Shah (Delhi School of Economics) |
| Abstract: | Pratt (1964) and Yaari (1969) contain the classical results pertaining to the equivalence of various notions of comparative risk aversion of von Neumann-Morgenstern utilities in the setting with real-valued outcomes. Some of these results have been extended to the setting with outcomes in < n . We obtain ana-logues of the classical results in the setting with outcomes in ordered topological vector spaces when differentiability is not required, and in the setting with out-comes in ordered Hilbert spaces when differentiability is required, as is the case when we work with a vector-valued generalized notion of an Arrow-Pratt coeffi-cient. |
| Keywords: | Comparative risk aversion, vector space of outcomes, acceptance set, vector-valued risk premia, vector-valued Arrow-Pratt coefficient, Pettis integral, ordered topological vector spaces, ordered Hilbert spaces |
| JEL: | D01 D81 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:149&r=upt |
| By: | Imen Bentahar |
| Abstract: | In his paper we introduce a quantile-based risk measure for multivariate financial positions "the vector-valued Tail-conditional-expectation (TCE)". We adopt the framework proposed by Jouini, Meddeb, and Touzi [9] to deal with multi-assets portfolios when one accounts for frictions in the financial market. In this framework, the space of risks formed by essentially bounded random vectors, is endowed with some partial vector preorder >= accounting for market frictions. In a first step we provide a definition for quantiles of vector-valued risks which is compatible with the preorder >=. The TCE is then introduced as a natural extension of the "classical" real-valued tail-conditional-expectation. Our main result states that for continuous distributions TCE is equal to a coherent vector-valued risk measure. We also provide a numerical algorithm for computing vector-valued quantiles and TCE. |
| Keywords: | Risk measures, vector-valued risk measures, coherent risk-measures, quantiles, tail-conditional-expectation |
| JEL: | C60 G13 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-029&r=upt |
| By: | Avner Shaked (Department of Economics, University of Bonn, Adenauerallee 24, 53113, Bonn, Germany) |
| Abstract: | In a number of papers on their theory of Inequity Aversion, E. Fehr and K. Schmidt have claimed that the theory explains the behavior in many experiments. By virtue of having an infinite number of parameters the theory can predict a wide range of outcomes, from the competitive to the cooperative. Its prediction depends on values of these parameters. Fehr & Schmidt provide no explicit methodological plan for their project and as a result they repeatedly make logical and methodological errors. We look at the methodology of their explanations and find that no connection has been established between the experimental data and the behavior predicted by the theory. We conclude that the theory of inequity aversion has no explanatory value beyond its trivial capacity to predict a broad range of outcomes as a function of its parameters. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:164&r=upt |
| By: | Giannis Vardas (Department of Economics, University of Crete); Anastasios Xepapadeas (Department of Economics, University of Crete) |
| Abstract: | Safety rules are developed, for biodiversity preservation. These rules are designed to take into account the impact of uncertainty and worst case scenarios, which when combined with unregulated ecosystem management decisions, might produce extinction of species. The safety rules take the form of fixed land allocation and fixed harvesting rules under uncertainty. We explore how model uncertainty affects these safety rules relative to the classic risk aversion case and how a measure of precaution against worst case scenarios can be formulated. |
| Keywords: | Biodiversity Preservation, Model Uncertainty, Safety Rules |
| JEL: | Q57 |
| Date: | 2006–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:0607&r=upt |