nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2007‒08‒27
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The biological basis of expected utility anomalies By Matsushita, Raul; Baldo, Dinora; Martin, Bruna; Da Silva, Sergio
  2. Probabilistic Sophistication and Stochastic Monotonicity in the Savage Framework By Simon Grant; Hatice Ozsoy; Ben Polak
  3. Loss aversion and mental accounting: the favorite longshot bias in parimutuel betting By Jianying Qiu
  4. Inefficient Policies and Incumbency Advantage By Hodler, R.; Loertscher , S.; Rohner, D.
  5. Investors and managers relationship in investment funds industry By Yao, Jean-Marie

  1. By: Matsushita, Raul; Baldo, Dinora; Martin, Bruna; Da Silva, Sergio
    Abstract: We assess the biological basis of expected utility anomalies through an experiment of the Allais paradox. A questionnaire study of 120 subjects replicates the anomalies and further gathers information about the respondents’ bio-characteristics, such as gender, age, parenthood, handedness, second to fourth digit ratio, current emotional state, past negative experiences, and religiousness. We find that some of those bio-characteristics matter for the anomalies.
    Keywords: expected utility anomalies; risky choice; Allais paradox; experimental economics
    JEL: D81 C91
    Date: 2007–08–17
  2. By: Simon Grant (Rice University); Hatice Ozsoy (Rice University); Ben Polak (Cowles Foundation, Yale University)
    Abstract: Machina & Schmeidler (1992) show that probabilistic sophistication can be obtained in a Savage setting without imposing expected utility by dropping Savage's axiom P2 (sure-thing principle) and strengthening his axiom P4 (weak comparative probability). Their stronger axiom, however, embodies a degree of separability analogous to P2. In this note, we obtain probabilistic sophistication using Savage's original axiom P4 and a weaker analog of Savage's P2.
    Keywords: Subjective probability; Probabilistic sophistication, Stochastic monotonicity, Sure-thing principle, Cumulative dominance
    JEL: D81
    Date: 2007–08
  3. By: Jianying Qiu (Max Planck Institute of Economics Jena, Strategic Interaction Group)
    Abstract: Parimutuel betting markets are simpliï¬ed ï¬nancial markets, and can thus provide a clearer view of pricing issues which are more complicated elsewhere. Though empirical studies generally conclude that the parimutuel betting markets are surprisingly effcient, it is also found that for horses with lowest odds (favorites), market estimates of winning probabilities are smaller than objective winning probabilities; for horses with highest odds (longshot), the opposite is observed. This phenomenon, called the favorite longshot bias, has many explanations such as risk seeking preference, transaction costs, and non-linear transformation of probabilities into decision weights, etc. This paper combines loss aversion with mental accounting, and provides a new explanation for the favorite longshot bias. We show that the bias exists in the absence of all above mentioned reasons, and the degree of the bias differs depending on the type of the mental accounting process that bettors apply.
    Keywords: loss aversion, mental accounting, parimutuel betting, favorite longshot bias
    JEL: C72 D40 D81 G10
    Date: 2007–05–30
  4. By: Hodler, R.; Loertscher , S.; Rohner, D.
    Abstract: We study incumbency advantage in a dynamic game with incomplete information between an incumbent and a voter. The incumbent knows the true state of the world, e.g., the severity of an economic recession or the level of criminal activities, and can choose the quality of his policy. This quality and the state of the world determine the policy outcome, i.e., the economic growth rate or the number of crimes committed. The voter only observes the policy outcome and then decides whether to reelect the incumbent or not. Her preferences are such that she would reelect the incumbent under full information if and only if the state of the world is above a given threshold level. In equilibrium, the incumbent is reelected in more states of the world than he would be under full information. In particular, he chooses ine±cient policies and generates mediocre policy outcomes whenever the voter's induced belief distribution will be such that her expected utility of reelecting the incumbent exceeds her expected utility of electing the opposition candidate. Hence, there is an incumbency advantage through ineficient policies. We provide empirical evidence consistent with the prediction that reelection concerns may induce incumbents to generate mediocre outcomes. Key words: Elections, Incumbency Advantage, Political Economics.
    JEL: D72 C73
    Date: 2007–05
  5. By: Yao, Jean-Marie
    Abstract: In this study we aim to determine the impact of investor behavior on investment funds strategies. Initially, we define the ideal profile of a potential investor in funds by highlighting risk aversion. We present a usual successive generation model in an open economy to characterize asset allocation. This approach will enable us to understand the distribution strategies. In the second time, differentiation strategies analysis will help us to understand the level of competition between firms on a given place. The results allow us to define the determinants that help a firm to choose between total differentiation and imitation. ---------- Dans cette étude nous nous proposons de cerner l’impact du comportement des investisseurs sur les stratégies des firmes de fonds d’investissement. Dans un premier temps, nous définissons le profil idéal d’un investisseur potentiel en fonds en tenant compte de son aversion pour le risque. Nous présentons un modèle usuel à générations successives dans une économie ouverte pour caractériser les choix de ventilations de produits actifs risqués et actifs sans risques. Cette approche nous permettra de comprendre les stratégies de recherche de clientèle des firmes de fonds d’investissement. Dans un second temps, l’analyse des stratégies de différenciation nous permettra de comprendre le niveau de concurrence que se livrent les firmes localisées sur une place donnée. Nous cherchons à comprendre le niveau de différenciation dans la sélection de clientèle. Ce résultat devrait nous permettre de définir les conditions dans lesquelles les firmes privilégient une stratégie de différenciation maximale par rapport à leurs concurrentes.
    Keywords: Investment Funds; Investors; Managers; Differentiation; Space economy. ---- Fonds d’investissement; Investisseurs; Mnageurs; Différenciation; Economie spatiale.
    JEL: H3 L1 G2
    Date: 2006–06

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