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on Utility Models and Prospect Theories |
| By: | Alexander Harin (Modern University for the Humanities) |
| Abstract: | The principle of uncertain future: the probability of a future event contains a degree of (hidden) uncertainty. As a result, this uncertainty (in a sense, similar to vibrations, fluctuations) pushes the probability value back from the bounds to the middle of its range (from the very high and very low probability values to the middle ones). In other words, the real values of high probabilities are lower than the preliminarily determined ones. Conversely, the real values of low probabilities are higher than the preliminarily determined ones. This result provides the uniform solution of a number of fundamental problems: the underweighting of high and the overweighting of low probabilities, the Allais paradox, risk aversion, loss aversion, the Ellsberg paradox, the equity premium puzzle, etc. The principle and its consequences can be applied in the fields of banking, investment, insurance, trade, industry, planning and forecasting. Explanations of the principle and examples of solution of three types of fundamental problems are provided. |
| Keywords: | uncertainty; risk; market; banking; industry; development; investments; insurance; utility |
| JEL: | C D C7 D8 A1 D81 G11 |
| Date: | 2006–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:nos:wuwpmi:harin_alexander.34115-061203&r=upt |
| By: | Vittorio Pelligra |
| Abstract: | Trust and trustworthiness are key elements, both at the micro and macro level, in sustaining the working of modern economies and their institutions. However, despite its centrality, trust continues to be considered as a “conceptual bumblebee”, it works in practice but not in theory. In particular, its behavioural rationale still represents a puzzle for traditional rational choice theory and game theory. In this paper “trust responsiveness”, an alternative explanatory principle that can account for trustful and trustworthy behaviour, is proposed. Such principle assumes that people can be motivated to behave trustworthily by trustful actions. The paper discusses the philosophical roots, the historical development, as well as the relational nature of this principle as well as its theoretical implications. |
| Keywords: | Trust, Trustworthiness, Game Theory, Adam Smith |
| JEL: | Z13 B31 C7 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:200614&r=upt |
| By: | Robert J. Barro |
| Abstract: | Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year. |
| JEL: | E21 E44 G12 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12763&r=upt |