|
on Utility Models and Prospect Theory |
| By: | Robert J. Aumann; Roberto Serrano |
| Abstract: | Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a "duality" axiom which, roughly speaking, asserts that less risk-averse individuals accept riskier gambles. The index is homogeneous of degree 1, monotonic with respect to first and second order stochastic dominance, and for gambles with normal distributions, is half of variance/mean. Examples are calculated, additional properties derived, and the index is compared with others in the literature. |
| Keywords: | Riskiness; Risk Aversion; Expected Utility; Decision Making under Uncertainty; Portfolio Choice; Sharpe Ratio; Variance-Mean Ratio; Value at Risk |
| JEL: | C00 C43 D00 D80 D81 E44 G00 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp446&r=upt |
| By: | David A. Jaeger (College of William and Mary and IZA); Holger Bonin (IZA and DIW Berlin); Thomas Dohmen (IZA and DIW Berlin); Armin Falk (University of Bonn, IZA, CEPR and DIW Berlin); David Huffman (IZA Bonn); Uwe Sunde (IZA, University of Bonn, CEPR and DIW Berlin) |
| Abstract: | Geographic mobility is important for the functioning of labor markets because it brings labor resources to where they can be most efficiently used. It has long been hypothesized that individuals' migration propensities depend on their attitudes towards risk, but the empirical evidence, to the extent that it exists, has been indirect. In this paper, we use newly available data from the German Socio-Economic Panel to measure directly the relationship between migration propensities and attitudes towards risk. We find that individuals who are more willing to take risks are more likely to migrate between labor markets in Germany. This result is robust to stratifying by age, sex, education, national origin, and a variety of other demographic characteristics, as well as to the level of aggregation used to define geographic mobility. The effect is substantial relative to the unconditional migration propensity and compared to the conventional determinants of migration. We also find that being more willing to take risks is more important for the extensive than for the intensive margin of migration. |
| Keywords: | risk aversion, migration, Germany |
| JEL: | J61 D81 R23 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2655&r=upt |
| By: | Panu Poutvaara (University of Helsinki and IZA); Lars-H. R. Siemers (RWI Essen) |
| Abstract: | We study the social interaction of non-smokers and smokers as a sequential game, incorporating insights from social psychology and experimental economics into an economic model. Social norms affect human behavior such that non-smokers do not ask smokers to stop smoking and stay with them, even though disutility from smoking exceeds utility from social interaction. Overall, smoking is unduly often accepted when accommodating smoking is the social norm. The introduction of smoking and non-smoking areas does not overcome this specific inefficiency. We conclude that smoking bans may represent a required (secondbest) policy. |
| Keywords: | smoking policy, social norms, guilt aversion, deviant behavior, social interaction |
| JEL: | I18 D01 D11 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2666&r=upt |
| By: | Marie-Laure Guillerminet; Richard S.J. Tol (Economic and Social Research Institute, Dublin) |
| Abstract: | A collapse of the West-Antarctic Ice Sheet (WAIS) would cause a sea level rise of 5-6 metres, perhaps even within one hundred years, with catastrophic consequences. The probability of such a collapse is small but increasing with the rise of the atmospheric concentrations of greenhouse gas and the resulting climate change. This paper investigates how the potential collapse of the WAIS affects the optimal rate of greenhouse gas emission control. We design a decision and learning tree in which decision are made about emission reduction at regular intervals. At the same time, the decision makers receive new information on the probability of a WAIS collapse and the severity of its impacts. The probability of a WAIS collapse is endogenous and contingent on greenhouse gas concentrations. We solve this optimisation problem by backward induction. We find that a potential WAIS collapse substantially bring the date of the optimal emission reduction forward and increases its amount if the probability is high enough, if the impacts are high enough, or if the decision maker is risk averse enough. We also find that, as soon as a WAIS collapse is a foregone fact, emission reduction falls to free up resource to prepare for adapting to the inevitable. |
| Keywords: | Decision making under uncertainty, West-Antarctic ice sheet |
| JEL: | Q54 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:sgc:wpaper:79&r=upt |
| By: | Enchuan Shao; Pedro Silos |
| Abstract: | This paper is concerned with the business cycle dynamics in search-and-matching models of the labor market when agents are ex post heterogeneous. We focus on wealth heterogeneity that comes as a result of imperfect opportunities to insure against idiosyncratic risk. We show that this heterogeneity implies wage rigidity relative to a complete insurance economy. The fraction of wealth-poor agents prevents real wages from falling too much in recessions since small decreases in income imply large losses in utility. Analogously, wages rise less in expansions compared with the standard model because small increases are enough for poor workers to accept job offers. This mechanism reduces the volatility of wages and increases the volatility of vacancies and unemployment. This channel can be relevant if the lack of insurance is large enough so that the fraction of agents close to the borrowing constraint is significant. However, discipline in the parameterization implies an earnings variance and persistence in the unemployment state that result in a large degree of self-insurance. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-05&r=upt |
| By: | Boari, Mircea (ESSEC Business School) |
| Abstract: | Starting with the concept of “rational maximizing individual”, a meta-construct with foundational value in economics and, in general, in human sciences, the paper delineates the territory of an ethics of rationality. It does this by taking fulcrum in findings from evolutionary theory, in particular those regarding spiteful behavior. The paper formulates the principle of “differential fitness maximization”, as expression of relative maximization of fitness and derives its consequences, among which, a core set of normative propositions grounding the said ethics. Thus, the paper strengthens the backbone of the Western philosophical tradition which, in essence, always associated ethical conduct with reason and individualism. |
| Keywords: | Evolutionary Ethics; Fitness; Normative Ethics; Rational Maximization; Spite |
| JEL: | A19 B52 C73 D01 P00 Z19 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-07004&r=upt |
| By: | Andrew Vivian |
| Abstract: | Recent US research has suggested that market expected returns have fallen. Most studies propose this fall in market expected returns occurred during the 1990’s. Our UK empirical analysis finds a fall in expected returns in the 1990’s for the market index, but, in general, this is not evident across many segments of the market. Specifically,we find for the majority of UK industries a) over recent decades there has not been a general or overall fall in expected returns and b) there was not a common decline in expected returns during the 1990’s. We propose changing industry composition of the market portfolio rather than a decline in systematic risk is primarily responsible for this recent proposed fall in value-weighted market returns. |
| Keywords: | Equity Premium, Declining Returns, Industry Composition. |
| JEL: | G12 G15 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0702&r=upt |