
on Utility Models and Prospect Theories 
By:  Francisco J. André (Department of Economics, Universidad Pablo de Olavide) 
Abstract:  In this paper, we propose an indirect method to elicit nonlinear multiattribute utility functions which is based on duality results. The idea is to obtain a utility function which is compatible with the observed behaviour of decision makers. The paper builds on a previous work by André and Riesgo (A noninteractive method to elicit nonlinear multiattribute utility functions. Theory and Application to Agricultural Economics. European Journal of Operational Research. In press) but it eliminates an important shortcoming, the necessity to estimate the efficient set, by using a DEAlike approach. 
Keywords:  MultiCriteria Decision Making, MultiAttribute Utility Function, Duality, DEA. 
JEL:  C61 D01 
Date:  2007–02 
URL:  http://d.repec.org/n?u=RePEc:pab:wpaper:07.02&r=upt 
By:  Nicholas M. Kiefer 
URL:  http://d.repec.org/n?u=RePEc:pri:indrel:67&r=upt 
By:  Eckhard Platen (School of Finance and Economics, University of Technology, Sydney); Wolfgang Runggaldier (Department of Pure and Applied Mathematics, University of Padova) 
Abstract:  This paper proposes a filtering methodology for portfolio optimization when some factors of the underlying model are only partially observed. The level of information is given by the observed quantities that are here supposed to be the primary securities and empirical logprice covariations. For a given level of information we determine the growth optimal portfolio, identify locally optimal portfolios that are located on a corresponding Markowitz efficient frontier and present an approach for expected utility maximization. We also present an expected utility indifference pricing approach under partial information for the pricing of nonreplicable contracts. This results in a real world pricing formula under partial information that turns out to be independent of the subjective utility of the investor and for which an equivalent risk neutral probability measure need not exist. 
Keywords:  portfolio ptimization; partial information; filtering, growth optimal portfolio; expected utility maximization; utility indifference pricing; real world pricing formula 
JEL:  G10 G13 
Date:  2007–01–01 
URL:  http://d.repec.org/n?u=RePEc:uts:rpaper:191&r=upt 
By:  Juan Carlos Candeal (University of Zaragoza); Esteban Induráin (Universidad Pública de Navarra); José Alberto Molina (University of Zaragoza and IZA) 
Abstract:  It is shown that any completely preordered topological real algebra admits a continuous utility representation which is an algebrahomomorphism (i.e., it is linear and multiplicative). As an application of this result, we provide an algebraic characterization of the projective (dictatorial) preorders defined on Rn. We then establish some welfare implications derived from our main result. In particular, the connection with the normative property called independence of the relative utility pace is discussed. 
Keywords:  algebraic utility, projective preorders 
JEL:  C60 C65 D60 D63 
Date:  2007–01 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp2594&r=upt 
By:  Bonin, Holger; Constant, Amelie; Tatsiramos, Konstantinos; Zimmermann, Klaus F 
Abstract:  The paper investigates the role of social norms as a determinant of individual attitudes by analyzing risk proclivity reported by immigrants and natives in a unique representative German survey. We employ factor analysis to construct measures of immigrants’ ethnic persistence and assimilation. The estimated effect of these measures on risk proclivity suggests that adaptation to the attitudes of the majority population closes the immigrantnative gap in risk proclivity, while stronger commitment to the home country preserves it. As risk attitudes are behaviorally relevant, and vary by ethnic origin, our results could also help explain differences in economic assimilation of immigrants. 
Keywords:  assimilation; ethnic persistence; gender; risk attitudes; second generation effects 
JEL:  D1 D81 F22 J15 J16 J31 J62 J82 
Date:  2007–02 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:6084&r=upt 
By:  Chiara Oldani (ISAE  Institute for Studies and Economic Analyses) 
Abstract:  This paper introduces a micromodel of portfolio utility to look at the effects of futures in the allocation process, starting from Lancastertype utility model (1991), further developed by Glennon and Lane (1996) on money demand; results underline the role of portfolio substitution and crowding out of inefficient financial assets. The synthetic model can be represented by money and financial innovation, lowering the dimension of the assets from 3 to 2. Statistical evidences confirm the validity of assumptions for the US economy at a static level. 
Keywords:  futures, money demand model, utility, substitution. 
JEL:  D8 E41 G11 
Date:  2006–05 
URL:  http://d.repec.org/n?u=RePEc:isa:wpaper:69&r=upt 
By:  James N. Brown 
URL:  http://d.repec.org/n?u=RePEc:pri:indrel:134&r=upt 
By:  Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos 
Abstract:  We show, in an exchange economy with default, liquidity constraints and no aggregate uncertainty, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of Dubey and Geanakoplos (1992). Two agents trade goods and nominal assets (ArrowDebreu (AD) securities) to smooth consumption across periods and future states, in the presence of cashinadvance financing costs. We show that, with Von NeumannMorgenstern logarithmic utility functions, the price of AD securities, are inversely related to liquidity. The upshot of our argument is that agentsâ€™ expectations computed using riskneutral probabilities give more weight in the states with higher interest rates. This result cannot be found in a Lucastype representative agent general equilibrium model where there is neither trade or money nor default. Hence, an upward yield curve can be supported in equilibrium, even though shortterm interest rates are fairly stable. The riskpremium in the term structure is therefore a pure default risk premium. 
Keywords:  cashinadvance constraints; riskneutral probabilities; state prices; term structure of interest rates 
JEL:  E43 G12 
Date:  2006 
URL:  http://d.repec.org/n?u=RePEc:sbs:wpsefe:2006fe15&r=upt 
By:  Carlos Casacuberta (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Néstor Gandelman (Universidad ORT, Uruguay) 
Abstract:  This paper analyzes a labor supply model in which individuals maximize a utility function that depends on leisure time, consumption and time devoted to an activity that is termed “artistic”. This activity may generate income that depends non linearly on hours dedicated to it. The individual can also work in the labor market (an activity that does not increase utility by itself) in exchange for an hourly wage, and obtain income not related to hours. Conditions are obtained that sort individuals in two groups, part time and full time artists, deriving their labor supply functions in both activities. The predictions of the model are tested empirically using a sample of musicians from a Uruguayan performing rights society. 
Keywords:  Labor supply, time allocation, artist’s labor supply, cultural economics 
JEL:  J22 Z11 
Date:  2006–11 
URL:  http://d.repec.org/n?u=RePEc:ude:wpaper:1906&r=upt 
By:  Bénabou, Roland; Tirole, Jean 
Abstract:  We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own 'deep values' and infer them from their past choices, which then come to define 'who they are'. Identity investments increase when information is scarce or when a greater endowment of some asset (wealth, career, family, culture) raises the stakes on viewing it as valuable (escalating commitments). Taboos against transactions or the mere contemplation of tradeoffs arise to protect fragile beliefs about the 'priceless' value of certain assets (life, freedom, love, faith) or things one 'would never do'. Whether such behaviours are welfareenhancing or reducing depends on whether beliefs are sought for a functional value (sense of direction, selfdiscipline) or for 'mental consumption' motives (selfesteem, anticipatory feelings). Escalating commitments can thus lead to a 'hedonic treadmill', and competing identities cause dysfunctional failures to invest in highreturn activities (education, adapting to globalization, assimilation), or even the destruction of productive assets. In social interactions, norm violations elicit a forceful response (exclusion, harassment) when they threaten a strongly held identity, but further erode morale when it was initially weak. Concerns for pride, dignity or wishful thinking lead to the inefficient breakdown of Coasian bargaining even under symmetric information, as partners seek to selfenhance and shift blame by turning down 'insultingly low' offers. 
Keywords:  anticipatory utility; bargaining; hedonic treadmill; identity; memory; religion; selfcontrol; selfimage; selfserving beliefs; taboos; wishful thinking 
JEL:  D81 D91 Z13 
Date:  2007–02 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:6123&r=upt 
By:  Pushpa, Rathie; Carlos, Radavelli; Sergio, Da Silva 
Abstract:  Prospect theory [4] of risky choices has been extended to encompass intertemporal choices [6]. Presentation of intertemporal prospect theory suffers from minor mistakes, however [2]. To clarify the theory we restate it and show further mistakes in current presentations ([6], [2]) of value and discount functions. 
JEL:  D91 
Date:  2006 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:1849&r=upt 
By:  Francisco Alonso (Banco de España); Roberto Blanco (Banco de España); Gonzalo Rubio (Euskal Herriko Unibertsitatea; Universitat Pompeu Fabra) 
Abstract:  The main objective of this paper is to analyse the value of information contained in prices of options on the IBEX 35 index at the Spanish Stock Exchange Market. The forward looking information is extracted using implied riskneutral density functions estimated by a mixture of two lognormals and several alternative risk adjustments: the power, exponential and habit inspired based stochastic discount factors. Moreover, by allowing additional flexibility in the shape of the stochastic discount factor, two other ad hoc time varying risk aversion adjustments are also employed. Our results show that, between October 1996 and March 2000, we can reject the hypothesis that the risk neutral densities provide accurate predictions of the distributions of future realisations of the IBEX 35 index at four and eight week horizons. When forecasting through risk adjusted densities the performance of this period is statistically improved and we no longer reject that hypothesis. Somehow surprisingly, all risk adjusted densities generate similar forecasting statistics. Finally, from October 1996 to December 2004, the ex ante risk premium perceived by investors and that are embedded in option prices is between 12 and 18 percent higher than the premium required to compensate the same investors for the realised volatility in stock market returns. 
Keywords:  riskadjustments, optionimplied densities, forecasting performance, equityrisk premium 
JEL:  G10 G12 
Date:  2006–11 
URL:  http://d.repec.org/n?u=RePEc:bde:wpaper:0630&r=upt 
By:  Hyun H. Son (International Poverty Centre, United Nations Development Programme); Nanak Kakwani (International Poverty Centre, United Nations Development Programme) 
Abstract:  This paper develops a methodology to measure the impact of price changes on poverty measured by an entire class of additive separable poverty measures. This impact is captured by means of price elasticity of poverty. The total effect of changes in price on poverty is explained in terms of two components. The first component is the income effect of the change in price and the second is the distribution effect captured by the price changes. It is the distribution effect which determines whether the price changes benefit the poor proportionally more (or less) than the nonpoor. This paper also derives a new price index for the poor (PIP). While this index can be computed for any poverty measures, our empirical analysis applied to Brazil is based on three poverty measures, the headcount ratio, the poverty gap ratio and the severity of poverty. The empirical results show that price changes in Brazil during the 19992006 period have occurred in a way that favors the nonpoor proportionally more than the poor. Nevertheless, during the last 23 years the price changes have favored the poor relative to the nonpoor. 
Keywords:  Inflation, Price elasticity, Money metric utility, Price index for the poor 
JEL:  B41 D11 D12 E31 I32 O54 
Date:  2006–11 
URL:  http://d.repec.org/n?u=RePEc:ipc:wpaper:0033&r=upt 
By:  Kizys, Renatas; Pierdzioch, Christian 
Abstract:  Building on the stochastic discount factor model, we estimated a multivariate exponential GARCHinmean model to analyze the link between the business cycle and the equity risk premium in the United States. In order to measure the business cycle, we used revised and realtime monthly data on industrial production for the period from 1963 to 2006. The main result of our empirical analysis is that estimates of the equity risk premium based on realtime data may significantly differ from estimates of the equity risk premium based on revised data. 
Keywords:  Stochastic discount factor model; multivariate exponential GARCHinmean model; United States; equity risk premium; realtime macroeconomic data 
JEL:  E44 G12 C32 E32 
Date:  2007–02 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:1823&r=upt 
By:  Nicola Gennaioli; Andrei Shleifer 
Abstract:  We investigate the evolution of common law under overruling, a system of precedent change in which appellate courts replace existing legal rules with new ones. We use a legal realist model, in which judges change the law to reflect their own preferences or attitudes, but changing the law is costly to them. The model's predictions are consistent with the empirical evidence on the overruling behavior of the U.S. Supreme Court and appellate courts. We find that overruling leads to unstable legal rules that rarely converge to efficiency. The selection of disputes for litigation does not change this conclusion. Our findings provide a rationale for the value of precedent, as well as for the general preference of appellate courts for distinguishing rather than overruling as a lawmaking strategy. 
JEL:  K13 K4 
Date:  2007–02 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:12913&r=upt 