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on Utility Models and Prospect Theory |
| By: | Erick W. Rengifo (Department of Economics. Fordham University, New York); Emanuela Trifan (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)) |
| Abstract: | This paper studies the attitude of non-professional investors towards financial losses and their decisions concerning wealth allocation among consumption, risky, and risk-free financial assets. We employ a two-dimensional utility setting in which both consumption and financial wealth fluctuations generate utility. The perception of financial wealth is modelled in an extended prospect-theory framework that accounts for both the distinction between gains and losses with respect to a subjective reference point and the impact of past performance on the current perception of the risky portfolio value. The decision problem is addressed in two distinct equilibrium settings in the aggregate market with a representative investor, namely with expected and non-expected utility. Empirical estimations performed on the basis of real market data and for various parameter configurations show that both settings similarly describe the attitude towards financial losses. Yet, the recommendations regarding wealth allocation are different. Maximizing expected utility results on average in low total-wealth percentages dedicated to consumption, but supports myopic loss aversion. Non-expected utility yields more reasonable assignments to consumption but also a high preference for risky assets. In this latter setting, myopic loss aversion holds solely when financial wealth fluctuations are viewed as the main utility source and in very soft form. |
| Keywords: | prospect theory, Value-at-Risk, loss aversion, expected utility, non-expected utility |
| JEL: | C32 C35 G10 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:181&r=upt |
| By: | Marisa Cenci; Massimiliano Corradini; Andrea Gheno |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0056&r=upt |
| By: | Kenny, Charles |
| Abstract: | The Stern Review adopts two interesting elements in its calculation of the costs and benefits of climate change mitigation. First is a ‘global welfarist’ approach that values the utility of the World’s people (now and into the future) equally, and sets global utility maximization as the correct goal for policy. Second is an assumption of a declining marginal utility to income. Consistent application of the ‘global welfarist’ approach and the declining marginal utility of income together would demand an urgent process of global income redistribution. Over the long term, this might see the richest ten percent of the World’s population facing an average redistributive tax rate in the region of 82 percent. |
| Keywords: | Stern Review; Climate Change; Welfare Economics |
| JEL: | Q54 O10 F20 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2281&r=upt |
| By: | Conchita D'Ambrosio; Joachim R. Frick |
| Abstract: | This paper explores the determinants of individual well-being as measured by self-reported levels of satisfaction with income. Making full use of the panel data nature of the German Socio-Economic Panel, we provide empirical evidence for well-being depending on absolute and on relative levels of income in a dynamic framework. This finding holds after controlling for other influential factors in a multivariate setting. The main novelty of the paper is the consideration of dynamic aspects: the individual's own history as well as the relative income performance with respect to the others living in the society under analysis do play a major role in the assessment of well-being. |
| Keywords: | Interdependent Preferences, Inequality Aversion, Status, Subjective Well-Being, SOEP |
| JEL: | D63 I31 D31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp673&r=upt |
| By: | M Ballin; M Scanu; Paola Vicard |
| Abstract: | The problem of monitoring and managing the data production process by means of process flow indicators is presented in a decision theory framework. Here it is shown how to represent and solve the decision problem via influence diagrams, i.e. Bayesian network supporting decisions. An illustrative example is provided. |
| Keywords: | Expected utility, graphical models, probability update, |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0066&r=upt |
| By: | Marisa Cenci; F Filippini |
| Abstract: | In this paper we analyse the portfolio selectionproblem with minimum transactionlots in the context of non-expected utility theory. We assume that the decisionmaker ranks the alternatives by using a specific DualExpectedUtility. This functionallows portfolio values less or equal a fixed benchmark tobe weighted inadifferent way from values greater than the fixedbenchmark. Under normallydistributedreturns and opportunechoice ofthe benchmark, the suggested approach leads to an NP-complete problemandhas the advantage ofusing mixed linear programming to obtainthe optimal portfolio. We also show resultsobtained by implementing the model on the Italian stock market. (keywords: dual expectedutility, portfolio selection, NP-completeness, linear programming with mixed variables) |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0050&r=upt |
| By: | Guillaume Biot-Paquerot (CEREGE - CEntre de REcherche en sciences de GEstion - [CNRS : EA1722] - [Groupe Sup de Co La Rochelle]); Jean-Luc Rossignol (CUREGE - Centre universitaire de recherche en gestion - [Université de Franche-Comté]) |
| Abstract: | Education supply in universities of most European countries has for the last ten years become a strategic matter. At present, French universities consider education supply as an investment. But they do not utilize all incentive mechanisms in order to drive their strategies. At the beginning of the year 2006, the public sector reform will tend to impose performance measurements of research and educational activities, in order to improve organizational efficiency. The aim of this reform in the French context is to provide driving elements to increase internal efficiency, social and economic impact of higher education system and to reinforce international attractiveness of public education institutions. The substitution of resources management by result management involves an agent's performance responsibility measurement. Evaluation becomes a central factor and is articulated with incentives system. The weakening of the property right system drives project bearers to maximize their utility instead of their incomes. In such a context, the understanding of individual strategies permits to understand constraints of management within universities, and to take into account the impact of stakeholders who take part in the value generation process. The major risk is to constraint the utility function of projects bearers by increasing their burden and their motivation. The result could be the limitation of the number of projects, and as well, the decreasing of university investments. |
| Keywords: | performance, public sector, universities, efficiency, value generation |
| Date: | 2007–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:hal-00137200_v1&r=upt |
| By: | Marianne Zandersen; Mette Termansen; Frank S. Jensen |
| Abstract: | We estimate changes in the total recreative value over a 20 year time period of a large newly established forest, using mixed specification of a random utility models and geographic information system. The models are estimated using data from two identical surveys in 1977 and 1997. We conduct three different spatial value transfers and test these on the new forest. Results suggest that the new forest increased the recreative value nearly 70 times over the 20 years, primarily due the maturing of the forest and changed patterns of behaviour. The value transfer to the new forest range between an underestimate of 57% and an overestimate of 349%, depending on the sampling of the choice set used as study sites in the transfer. |
| Keywords: | recreation, random utility model, GIS |
| JEL: | Q23 Q51 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:sgc:wpaper:80&r=upt |
| By: | Olivier Blanchard (Massachusetts Institute of Technology); Jordi Galí (Universitat Pompeu Fabra) |
| Abstract: | We develop a utility based model of fluctuations, with nominal rigidities, and unemployment. In doing so, we combine two strands of research: the New Keynesian model with its focus on nominal rigidities, and the Diamond-Mortensen-Pissarides model, with its focus on labor market frictions and unemployment. In developing this model, we proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and we draw the implications for optimal monetary policy. |
| Keywords: | New Keynesian Model, Labor Market Frictions, Search Model, Unemployment, Sticky Prices, Real Wage Rigidities |
| JEL: | E32 E50 |
| Date: | 2007–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200708&r=upt |
| By: | Pierre-André Chiappori (Columbia University); Murat Iyigun (University of Colorado and IZA); Yoram Weiss (Tel Aviv University and IZA) |
| Abstract: | We reconsider the well known Becker-Coase (BC) argument, according to which changes in divorce laws should not affect divorce rates, in the context of households which consume public goods in addition to private goods. For this result to hold, utility must be transferable both within marriage and upon divorce, and the marginal rate of substitution between public and private consumption needs to be invariant in marital status. We develop a model in which couples consume public goods and show that if divorce alters the way some goods are consumed (either because some goods that are public in marriage become private in divorce or because divorce affects the marginal rate of substitution between public and private goods), then the Becker-Coase theorem holds only under strict quasi-linearity. We conclude that, in general, divorce laws will influence the divorce rate, although the impact of a change in divorce laws can go in either direction. |
| Keywords: | Becker-Coase theorem, collective model, divorce rates |
| JEL: | C78 D61 D70 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2646&r=upt |
| By: | A Feduzi |
| Abstract: | A number of scholars have noted that Ellsberg’s seminal 1961QJE critique of the subjective expected utility model bears certain resemblances to ideas expressed in J. M. Keynes’s earlier 1921 A Treatise on Probability. Ellsberg did not mention Keynes’s work in his article, but did do so in his doctoral dissertation submitted in 1962 and recently published in 2001. This gives rise to a number of interesting questions concerning the relationship between the contributions of the two authors. The present paper, drawing in part on a conversation with Ellsberg, attempts to answer these questions. The main conclusions that emerge are that Ellsberg formulated the ideas advanced in the QJE article before having read, and thus independently of, Keynes’s work, and that, even though he later recognised the importance and originality of Keynes’s work in his PhD dissertation, he did not fully appreciate the constructive part of Keynes’s analysis. 1. Introduction The last twenty years have seen a revival of |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0051&r=upt |
| By: | Niku Määttänen (ETLA, Helsinki); Panu Poutvaara (University of Helsinki and IZA) |
| Abstract: | We study the welfare effects of earnings testing flat-rate old-age benefits in a quantitative overlapping generations model with idiosyncratic labor income risk. In our model economy, even a moderate earnings testing reduces individuals’ expected lifetime utility, whenever other taxes are taken into account. Moreover, it also lowers the realized lifetime utilities of those at the bottom of the lifetime utility distribution. |
| Keywords: | social security, retirement, means-testing |
| JEL: | H55 J26 C68 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2616&r=upt |