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on Utility Models and Prospect Theory |
| By: | Borglin, Anders (Department of Economics, Lund University); Flåm, Sjur (Economics Department, Bergen University;) |
| Abstract: | Risk exchange is considered here as a cooperative game with transferable utility. The set-up fits markets for insurance, securities and contingent endowments. When convoluted payoff is concave at the aggregate endowment, there is a price-supported core solution. Under variance aversion the latter mirrors the two-fund separation in allocating to each agent some sure holding plus a fraction of the aggregate. |
| Keywords: | securities; mutual insurance; market or production games; transferable utility; extremal convolution; core solutions; variance or risk aversion; two-fund separation; CAPM |
| JEL: | C61 G11 G12 G13 |
| Date: | 2007–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2007_016&r=upt |
| By: | Jim Engle-Warnick; Javier Escobal; Sonia Laszlo |
| Abstract: | The lack of adoption of new farming technologies despite known benefits is a well-documented phenomenon in development economics. In addition to a number of market constraints, risk aversion predominates the discussion of behavioral determinants of technology adoption. We hypothesize that ambiguity aversion may also be a determinant, since farmers may have less information about the distribution of yield outcomes from new technologies compared with traditional technologies. We test this hypothesis with a laboratory experiment in the field in which we measure risk and ambiguity preferences. We combine our experiment with a survey in which we collect information on farm decisions and identify market constraints. We find that ambiguity aversion does indeed predict actual technology choices on the farm. |
| JEL: | O33 O18 C91 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcl:mclwop:2007-04&r=upt |
| By: | Dorn, Daniel; Huberman, Gur |
| Abstract: | The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks with volatilities commensurate with their risk aversion; more risk-averse individuals pick lower-volatility stocks. The investors' portfolio perspective overlooks return correlations. The data, 1995-2000 holdings of over 20,000 customers of a German broker, are consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk averse customers indeed hold less volatile stocks. Cross-sectionally, the more risk averse investors also have a stronger tendency to invest in mutual funds. Major improvements in diversification are concentrated during periods when investors add money to their account. |
| Keywords: | preferred risk habitat; risk; risk aversion; stock portfolio; volatility |
| JEL: | G10 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6532&r=upt |
| By: | Marco Dall'Aglio; Fabio Maccheroni |
| Abstract: | In this paper we consider the classical problem of dividing a land among many agents so that everybody is satisfied with the parcel she receives. In the literature, it is usually assumed that all the agents are endowed with cardinally comparable, additive, and monotone utility functions. In many economic and political situations violations of these assumptions may arise. We show how a family of cardinally comparable utility functions can be obtained starting directly from the agents’ preferences, and how a fair division of the land is feasible, without additivity or monotonicity requirements. Moreover, if the land to be divided can be modelled as a finite dimensional simplex, it is possible to obtain envy-free (and a fortiori fair) divisions of it into subsimplexes. The main tool is an extension of a representation theorem of Gilboa and Schmeidler (1989). |
| Keywords: | Gender Fair Division; Envy-freeness; Preference Representation. |
| JEL: | D01 D74 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:58&r=upt |
| By: | Christopher J. Tyson (Queen Mary, University of London) |
| Abstract: | A theory of decision making is proposed that offers an axiomatic basis for the notion of “satisficing” postulated by Herbert Simon. The theory relaxes the standard assumption that the decision maker always fully perceives his preferences among the available alternatives, requiring instead that his ability to perceive any given preference be decreasing with respect to the complexity of the choice problem at hand. When complexity is aligned with set inclusion, this exercise is shown to be equivalent to abandoning the contraction consistency axiom of classical choice theory. |
| Keywords: | Choice function, Perception, Revealed preference, Threshold |
| JEL: | D01 D11 D80 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp614&r=upt |
| By: | Ali al-Nowaihi; Sanjit Dhami |
| Abstract: | In a critique of the Loewenstein and Prelec (1992) theory of intertemporal choice, al-Nowaihi and Dhami (2006) point out to four errors. One of the alleged errors was that the value function in prospect theory is decreasing. But it is in fact increasing. We provide a correction and a formal proof. As a corollary, we show that the elasticity of the value function is bounded between zero and one. Nevertheless, all the remaining points in al-Nowaihi and Dhami (2006) remain valid. |
| Keywords: | Anomalies of the DU model; Intertemporal choice; Generalized hyperbolic discounting |
| JEL: | C60 D91 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:07/13&r=upt |
| By: | Finn Tarp (Department of Economics, University of Copenhagen); Lars Peter Østerdal (Department of Economics, University of Copenhagen) |
| Abstract: | This paper characterizes the principle of first order stochastic dominance in a multivariate discrete setting. We show that a distribution f first order stochastic dominates distribution g if and only if f can be obtained from g by iteratively shifting density from one outcome to another that is better. For the bivariate case, we develop the theoretical basis for an algorithmic dominance test that is easy to implement. |
| Keywords: | multidimensional first degree distributional dominance; robust poverty gap dominance; majorization; generalized equivalence result |
| JEL: | D63 I32 O15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0723&r=upt |
| By: | Christopher J. Tyson (Queen Mary, University of London) |
| Abstract: | The capital management problem posed by R. H. Strotz is analyzed for the case of the "naive" planner who fails to anticipate changes in his own preferences. By imposing progressively stronger restrictions on the primitives of the problem - namely, the discounting function, the utility index function, and the investment technology - the planner's behavior is characterized first as the solution to an ordinary differential equation and then via explicit formulae. Inasmuch as these characterizations leave the discounting function essentially unrestricted, the theory can accommodate, in particular, decision makers who discount time according to the hyperbolic and "quasi-hyperbolic" curves used in applied work and said to be supported by psychological studies. Comparative statics of the model are discussed, as are extensions of the analysis to allow for credit constraints, limited foresight, and partial commitment. |
| Keywords: | Consumption, Commitment, Hyperbolic discounting, Time preference |
| JEL: | D91 E21 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp615&r=upt |