|
on Utility Models and Prospect Theory |
| By: | Vicki Knoblauch (University of Connecticut) |
| Abstract: | A single formula assigns a continuous utility function to every representable preference relation. |
| Keywords: | utility, preferences, continuity |
| JEL: | D01 D11 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2007-17&r=upt |
| By: | Alexander Schied |
| Abstract: | We give an explicit PDE characterization for the solution of the problem of maximizing the utility of both terminal wealth and intertemporal consumption under model uncertainty. The underlying market model consists of a risky asset, whose volatility and long-term trend are driven by an external stochastic factor process. The robust utility functional is defined in terms of a HARA utility function with risk aversion parameter 0 < a < 1 and a dynamically consistent coherent risk measure, which allows for model uncertainty in the distributions of both the asset price dynamics and the factor process. Our method combines recent results by Wittmüss (2007) on the duality theory of robust optimization of consumption with a stochastic control approach to the dual problem of determining a 'worst-case martingale measure'. |
| Keywords: | Optimal Consumption, Robust Control, Model Uncertainty, Incomplete Markets, Stochastic Volatility, Coherent Risk Measures, Convex Duality |
| JEL: | G11 D81 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2007-026&r=upt |
| By: | Marie Pfiffelmann (LaRGE (Laboratoire de Recherche en Gestion et en Economie),FSEG, ULP, Université de Strasbourg I, Pôle Européen de Gestion et d’Economie) |
| Abstract: | Lottery-linked deposit accounts (LLDAs) are financial assets that provide an interest rate determined by a lottery. These accounts that combine savings and lottery have become very popular in recent years and in a number of countries (Guillen and Tschoegel). However, their existence cannot be explained in the framework of the expected utility model. Their popularity can only be understood in light of behavioral finance studies, especially if individual preferences are described by Kahneman and Tversky's cumulative prospect theory (1992). Actually, this theory provides a good explanation for the emergence of these deposit accounots by integrating simultaneously risk-averse and risk-seeking behaviors. In this paper, we propose a behavioral analysis of these financial assets by assuming that investors' individuals preferences obey cumulative prospect theory. We study how the structure of prizes of the LLDAs should be framed to appeal to and attract many investors. Our aim is thus to determine the optimal design of these financial assets. |
| JEL: | D81 G11 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:07-010&r=upt |
| By: | Ewald, Christian-Oliver; Xiao, Yajun |
| Abstract: | We consider a continuous time market model, in which agents influence asset prices. The agents are assumed to be rational and maximizing expected utility from terminal wealth. They share the same utility function but are allowed to possess different levels of information. Technically our model represents a stochastic differential game with anticipative strategy sets. We derive necessary and sufficient criteria for the existence of Nash-equilibria and characterize them for various levels of information asymmetry. Furthermore we study in how far the asymmetry in the level of information influences Nash-equilibria and general welfare. We show that under certain conditions in a competitive environment an increased level of information may in fact lower the level of general welfare. This effect can not be observed in representative agent based models, where information always increases welfare. Finally we extend our model in a way, that we add prior stages, in which agents are allowed to buy and sell information from each other, before engaging in trading with the market assets. We determine equilibrium prices for particular pieces of information in this setup. |
| Keywords: | information; financial markets; stochastic differential games |
| JEL: | G14 G11 C73 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3301&r=upt |
| By: | Floris Heukelom (Universiteit van Amsterdam) |
| Abstract: | The most important financial source for behavioral economics is the Russell Sage Foundation (RSF). The most prominent behavioral economists among the RSF’s twenty-six member Behavioral Economics Roundtable (BER) are Kahneman, Tversky, Thaler, Camerer, Loewenstein, Rabin, and Laibson. The theoretical core of behavioral economics made up of the work of these seven researchers is positioned in opposition to Adam Smith/Hayek type of economics, as exemplified by experimental economists Vernon Smith and Plott; and what is referred to as ‘mainstream’ or ‘traditional’ economics, meaning the neoclassical economics that roughly builds on Samuelson. On the basis of an overview of the work of these seven behavioral economists, a theoretical division can be observed within behavioral economics. The first branch considers human decision-making to be a problem of exogenous uncertainty, which can be analyzed with decision theory. It employs traditional economics as a nor! mative benchmark and favors a normative-descriptive(-prescriptive) distinction for economics. The second branch considers human decision-making to be a problem of strategic interaction, in which the uncertainty is endogenous. Its main tool is game theory. It rejects traditional economics both positively and normatively. |
| Keywords: | Behavioral economics; Russell Sage Foundation; experimental economics; Kahneman; Tversky; Thaler; Laibson; Loewenstein; Rabin; Camerer |
| JEL: | A12 B21 B31 D0 |
| Date: | 2007–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20070020&r=upt |