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on Utility Models and Prospect Theories |
| By: | Jim Engle-Warnick; Sonia Laszlo |
| Abstract: | We experimentally test whether risk aversion or ambiguity aversion can explain decisions in a learning-by-doing game. We first measure subjects' preferences toward risk and ambiguity, and then use these measures to predict behavior in the game. We find that ambiguity averse subjects pay more often to resolve ambiguity, and we find that less risk averse subjects earn more in the game. Our results, in light of a previous field study of farmers in a developing economy, provide further evidence of a link between ambiguity aversion and technology choice, as well as a link between risk aversion and farm profitability. <P>Une étude expérimentale a été menée afin de tester si l’aversion au risque ou l’aversion à l’ambiguïté peuvent expliquer les décisions prises par les sujets lors d’un jeu d’apprentissage par essais. Nous avons d’abord mesuré la préférence des sujets face au risque et à l’ambiguïté, et avons ensuite utilisé ces mesures pour prédire le comportement des sujets au cours du jeu. Nous avons pu constater que les sujets qui éprouvent de l’aversion à l’ambiguïté décident de payer plus souvent afin de clarifier cette ambiguïté. D’autre part, nous avons constaté que moins les sujets éprouvent de l’aversion au risque, plus leurs gains lors du jeu sont élevés. À la lumière d’une étude sur le terrain ayant eu lieu avec des fermiers travaillant dans une économie en développement, nos résultats confirment l'évidence d'un lien entre l'aversion à l'ambiguïté et les choix technologiques, ainsi que d'un lien entre l'aversion au risque et la rentabilité d'une ferme. |
| Keywords: | learning-by-doing, technology choice, risk preferences, risk measurement instruments, ambiguity aversion, experimental economics, apprentissage par essais, choix technologiques, préférences vis-à-vis du risque, instruments de mesure du risque, aversion à l’ambiguïté, économie expérimentale |
| JEL: | C91 D80 |
| Date: | 2006–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2006s-29&r=upt |
| By: | Andrea Morone; Ozlem Ozdemir |
| Abstract: | The study investigates protective responses in low probability and high loss risk situations. Particularly, it (1) detects individual protection valuations to variations in probability versus to variations in loss for payment decisions and choice decisions, (2) elicits the threshold probability in individuals’ minds that make them consider having protective measure, (3)calculates relative risk aversion. The results of the experiment indicate that as the probability of loss and loss amount increases, individuals tend to buy/pay more for protection. They are more responsive to the variation in probabilities than to the variation in loss amounts when they decide whether to buy the protective measure or not: choice decision. Yet, the opposite is true when they decide the amount of willingness to pay for buying the protective measure: payment decision. In addition, bid expected loss values have a bimodal distribution. Consistent with previous studies, individuals (particularly women) are found to be risk averse for low probabilities. |
| Keywords: | experiments, risk, insurance |
| JEL: | C91 D81 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-34&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:200615&r=upt |
| By: | Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, University of Wisconsin-Madison); Dan Silverman (Department of Economics, University of Michigan) |
| Abstract: | We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment. |
| Keywords: | Unemployment, consumption commitments, optimal contracts |
| JEL: | D21 D31 D81 |
| Date: | 2006–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:06-028&r=upt |
| By: | Houser, Daniel; Schunk, Daniel; Winter, Joachim |
| Abstract: | The relationship between trust and risk is a topic of enduring interest. Although there are substantial differences between the ideas the terms express, many researchers from different disciplines have pointed out that these two concepts become very closely related in personal exchange contexts. This raises the important practical concern over whether behaviors in the widely-used “trust game” actually measure trust, or instead reveal more about risk attitudes. It is critical to confront this question rigorously, as data from these games are increasingly used to support conclusions from a wide variety of fields including macroeconomic development, social psychology and cultural anthropology. The aim of this paper is to provide cogent evidence on the relationship between trust and risk in “trust” games. Subjects in our experiment participate either in a trust game or in its risk game counterpart. In the trust version, subjects play a standard trust game and know their counterparts are human. In the risk version, subjects know their counterparts are computers making random decisions. We compare decisions between these treatments, and also correlate behavior with subjects’ risk attitudes as measured by the Holt and Laury (2002) risk instrument. We provide evidence that trusting behavior is different than behavior under risk. In particular, (i) decisions patterns in our trust and risk games are significantly different; and (ii) risk attitudes correlate with decisions in the risk game, but not the trust game. |
| Keywords: | trust; risk attitudes; laboratory experiments |
| JEL: | C91 C92 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:1350&r=upt |
| By: | Miller, Marcus; Zhang, Lei |
| Abstract: | Two key issues are examined in an integrated framework: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss Aversion in Emerging Markets, their precautionary savings can generate substantial ‘global imbalances’, especially if there is an inefficient supply of global ‘insurance’. A combination of fear and market failure generates imbalances as a general equilibrium outcome. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level: but disequilibrium may result if the required real interest rate is negative. A precautionary savings glut appears to us to be a temporary phenomenon, however, destined for correction as and when adequate reserve levels are achieved. If the process of correction is triggered by ‘Sudden Stop’ on capital flows to the US, might this not lead to 'hard landing' that is forecast by several leading macroeconomists? When precautionary saving is combined with financial panic, history offers no guarantee of full employment. |
| Keywords: | liquidity trap; loss aversion; stochastic dynamic general equilibrium |
| JEL: | D51 D52 E12 E13 E21 E44 F32 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6000&r=upt |
| By: | ALBERTO MAYDEU (Instituto de Empresa) |
| Abstract: | The classical method (Mosteller, 1951) for estimating Thurstone´s Case V model for ranking data consists in a) transforming the observed ranking patterns to patterns of binary paired comparisons, b) obtaining the normal deviate corresponding to the men of each binary variable, and c) estimate the model parameters from these deviates by least squares. However, classical procedures do not take into account the dependencies among the deviates and as a result, asymptotic standard errors (SEs) and goodness of fit (GOF) test are incorrect. |
| Keywords: | Categorical data analysis, Preference data, Random utility models |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:emp:wpaper:wp06-25&r=upt |
| By: | Avner Ben-Ner; Louis Putterman |
| Abstract: | In the one-shot trust or investment game without opportunities for reputation formation or contracting, economic theory predicts no trusting because there is no incentive for trustworthiness. Under these conditions, theory predicts (a) no effect of pre-play communication, and (b) universal preference for moderate cost binding contracts over interacting without contracts. We introduce the opportunities to engage in pre-play communication and to enter binding or non-binding contracts, and find (a) communication increases trusting and trustworthiness, (b) contracts are largely unnecessary for trusting and trustworthy behaviors and are eschewed by many players, and (c) more trusting leads to higher earnings, and (d) both trustors and trustees favor “fair and efficient” proposals over the more unequal proposals predicted by theory. |
| Keywords: | trust game, trust, trustworthiness, reciprocity, commitment, communication. Comparative analysis of agency problems, Production of public goods |
| JEL: | C72 C91 D63 |
| URL: | http://d.repec.org/n?u=RePEc:hrr:papers:0206&r=upt |
| By: | Galor, Oded; Michalopoulos, Stelios |
| Abstract: | This research suggests that the evolution of entrepreneurial spirit played a significant role in the process of economic development and the evolution of inequality within and across societies. The study argues that entrepreneurial spirit evolved non-monotonically in the course of human history. In early stages of development, the rise in income generated an evolutionary advantage to entrepreneurial, growth promoting traits and their increased representation accelerated the pace of technological advancements and the process of economic development. Natural selection therefore had magnified growth promoting activities in relatively wealthier economies as well as within the upper segments of societies, enlarging the income gap within as well as across societies. In mature stages of development, however, non-entrepreneurial individuals gained an evolutionary advantage, diminishing the growth potential of advanced economies and contributing to the convergence of the intermediate level economies to the advanced ones. |
| Keywords: | evolution; growth; natural Selection; risk Aversion; technological progress |
| JEL: | J11 J13 O11 O14 O33 O40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6022&r=upt |