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on Utility Models and Prospect Theory |
| By: | Simon Gächter (University of Nottingham, CESifo and IZA); Eric J. Johnson (Columbia University); Andreas Herrmann (University of St. Gallen) |
| Abstract: | Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education. |
| Keywords: | loss aversion, endowment effect, field experiments |
| JEL: | C91 C93 D81 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2961&r=upt |
| By: | Hernando Zuleta |
| Abstract: | We try to explain why economic conflicts and illegal business often take place in poor countries. We use the concept of subsistence level of consumption (d) and assume a regular concave utility function for consumption levels higher than d. For consumption levels lower than d utility is constant and equal to zero. Under this framework poor agents are risk-lovers. This result helps to explain why economic conflicts are more likely to appear in poor economies and why poor agents are more willing to undertake illegal business. |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:003356&r=upt |
| By: | Christian Belzil (Centre National de la Recherche Scientifique, CIRANO and IZA); Marco Leonardi (University of Milan and IZA) |
| Abstract: | We develop a non-rational expectation econometric model of sequential schooling decisions. Using unique Italian panel data in which individual differences in attitudes toward risk are measurable (with error), we investigate the effect of risk aversion on the probability of entering higher education. This allows us to characterize the subjective (as opposed to the objective) effect of higher education on marginal risk exposure. Because the measure of risk aversion (the classical Arrow-Pratt degree of absolute risk aversion) is posterior to schooling decisions, it depends on current wealth realizations and we must therefore take into account its endogeneity. We also allow risk aversion to be measured with error. After taking into account both the endogeneity of wealth and measurement error, we find that risk aversion is a key determinant (comparable to parents’ educational background) of the decisions to enter higher education. Precisely, risk aversion acts as a deterrent to higher education investment. |
| Keywords: | risk aversion, ex-ante risk, schooling, subjective beliefs, dynamic discrete choices |
| JEL: | J24 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2994&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | The paper re-visits two points of a paper by the author, published earlier in 2007. Additional analyses are set out first, on the issue of the boundary between products of economic value and flows between them, and second, on the structure of the Cobb Douglas function derived from thermodynamic theory. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:ten12007&r=upt |
| By: | MALDONADO, Darío |
| Abstract: | In this paper I consider the normative arguments that justify a public social security system as a redistributive device when goverment is concerned with individual utility and poverty. Redistribution can be done using social security, income taxation or both. The main objective of this paper is to show how the consideration of a planner that cares about poverty and utility increases the desirability of social with respect to the case when the planner only cares about utility. |
| Date: | 2006–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:000151:003513&r=upt |