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on Utility Models and Prospect Theory |
| By: | André de Palma (THEMA,University of Cergy-Pontoise); Moshe Ben-Akiva (Massachusetts Institute of Technology); David Brownstone (University of California at Irvine); Charles Holt (University of Virginia); Thierry Magnac (Toulouse School of Economics); Daniel McFadden (University of California, Berkeley); Peter Moffatt (University of East Anglia); Nathalie Picard (University of Cergy-Pontoise); Kenneth Train (University of California, Berkeley); Peter Wakker (Erasmus University); Joan Walker (Boston University) |
| Abstract: | This paper examines the cross-fertilizations of random utility models with the study of decision making under risk and uncertainty. We start with a description of the Expected Utility (EU) theory and then consider deviations from the standard EU frameworks, involving the Allais paradox and the Ellsberg paradox, inter alia. We then discuss how the resulting Non-EU framework can be modeled and estimated within the framework of discrete choices in static and dynamic contexts. Our objectives in addressing risk and ambiguity in individual choice contexts are to understand the decision choice process, and to use behavioral information for prediction, prescription and policy analysis. |
| Keywords: | discrete choice, decision making, risk, uncertainty, (cumulative) prospect theory, ambiguity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-02&r=upt |
| By: | Sudhir A. Shah (Department of Economics, Delhi School of Economics, Delhi, India) |
| Abstract: | We consider a decision-making environment with an outcome space that is a convex and compact subset of a vector space belonging to a general class of such spaces. Given this outcome space, we de¯ne gen- eral classes of (a) risk averse von Neumann-Morgenstern utility func- tions de¯ned over the outcome space, (b) multi-valued mappings that yield the certainty equivalent outcomes corresponding to a lottery, (c) multi-valued mappings that yield the risk premia corresponding to a lottery, and (d) multi-valued mappings that yield the acceptance set of lotteries corresponding to an outcome. Our duality results establish that the usual mappings that generate (b), (c) and (d) from (a) are bi- jective. We apply these results to the problem of computing the value of ¯nancial assets to a risk averse decision-maker and show that this value will always be less than the arbitrage-free valuation. |
| Keywords: | Risk aversion, vector outcomes, certainty equivalence, risk premia, acceptance set |
| JEL: | C02 D01 D81 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:160&r=upt |
| By: | Sudhir A. Shah (Department of Economics, Delhi School of Economics, Delhi, India) |
| Abstract: | We present theorems that establish dualities, i.e., bijections, be- tween speci¯ed sets of direct utility functions, indirect utility functions and expenditure functions. The substantive properties characterizing the speci¯ed set of direct utility functions are strong monotonicity, upper semicontinuity and quasi-concavity. Our results are strictly in- termediate between two classes of analogous results in the literature. We also provide applications that use all the three classes of duality results. |
| Keywords: | Direct utility function, indirect utility function, ex-penditure function, duality, strong monotonicity |
| JEL: | C65 D11 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:161&r=upt |
| By: | Han Bleichrodt (Erasmus University of Rotterdam); Jose Luis Pinto-Prades (Centro de Estudios Andaluces) |
| Abstract: | A central assumption in health utility measurement is that preferences are invariant to the elicitation method that is used. This assumptioin is challenged by preferences reversals. Previous studies have observed prefrence resersals between choise and matching tasks and between choise and ranking tasks. We present a new preference reversal that entirely choise-based. Because choise is the basic primitive of economics and utility theory, this preference reversal is more fundamental and troubling. The preference reversal was observed in two studies regarding health states after stroke. Both studies involved large representative samples from the Spanish population, interwied professionally and face-to-face. Possible explanations for the preference reversal are the anticipation of disappointment and elation is risky choise anda the impact of ethical co0nsiderations about the value of live. |
| Keywords: | Health utility measurement, preference reversal, choice behavior |
| JEL: | D81 L10 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2007_15&r=upt |
| By: | Stephen Satchell; Susan Thorp |
| Abstract: | We determine optimal consumption paths under a series of returns scenarios for charitable endowments with distinct tastes over investment risk and inter-temporal substitution. Charities typically prefer smooth consumption paths but are investment-risk tolerant. Using a recursive, Kreps-Porteus utility function, we model the optimal disbursement from an infinitely-lived charitable trust, then, allowing a general form for the returns density, we apply stochastic dominance relations to estimate income/substitution effects whereby a change in future returns influences the current consumption rate. The elasticity of intertemporal substitution rather than risk aversion is key: optimal consumption rises or falls as the elasticity diverges from one. |
| JEL: | G00 D81 D91 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-03&r=upt |
| By: | Filippo Taddei |
| Abstract: | Introducing heterogeneity of beliefs across different agents builds a link between wealth distribution and the equity premium. We demonstrate that an economy populated only by risk neutral agents may nonetheless display a strictly positive equity premium. We then place our notion of belief heterogeneity within the popular representative agent construct. We show that any level of belief heterogeneity in the multi agent economy can be mapped into some specific degree of risk aversion of the representative agent economy that keeps equilibrium prices constant. A fully dynamic model follows. Finally, we suggest an explanation for the recent behavior of the equity premium: a story of "heterogeneous optimism" versus "homogeneous pessimism" is presented. |
| Keywords: | Belief Heterogeneity, Equity Premium Puzzle, Representative Agent, Risk Aversion, Wealth Distribution. |
| JEL: | D31 D51 D84 G12 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:67&r=upt |
| By: | Susan K. Laury; Melayne Morgan McInnes; J. Todd Swarthout |
| Abstract: | It is widely accepted that individuals tend to underinsure against low-probability, high-loss events relative to high-probability, low-loss events. This conventional wisdom is based largely on field studies, as there is very little experimental evidence. We reexamine this issue with an experiment that accounts for possible confounds in prior insurance experiments. Our results are counter to the prior experimental evidence, as we observe subjects buying more insurance for low-probability events than the higher-probability events, given a constant expected loss and load factor. Our results suggest that, to the extent underinsurance for catastrophic risk is observed in the field, it can be attributed to factors other than the relative probability of the loss events. |
| Keywords: | low-probability hazards, insurance, risk, experiments |
| JEL: | C91 D80 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2008-03&r=upt |
| By: | T. DEMUYNCK |
| Abstract: | We introduce an Absolute (Relative) Time-consistent Axiom of Revealed Preference which characterizes the consistency of a choice function with the property of absolute (relative) time-consistency and impatience. The axiom requires that the absolute (relative) time-consistent and impatient closure of the revealed preference relation does not conflict with the strict revealed preference relation. |
| Keywords: | Time-consistency; Revealed Preference, Choice Function. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/485&r=upt |
| By: | Jungmin Lee (Department of Economics, Florida International University); Cary Deck (Department of Economics, University of Arkansas); Javier Reyes (Department of Economics, University of Arkansas); Chris Rosen (Department of Management, University of Arkansas) |
| Abstract: | This study measures risk attitudes using two paid experiments: the Holt and Laury (2002) procedure and a variation of the game show Deal or No Deal. The participants also completed a series of personality questionnaires developed in the psychology literature including the risk domains of Weber, Blais, and Betz (2002). As in previous studies risk attitudes vary within subjects across elicitation methods. However, this variation can be explained by individual personality traits. Specifically, subjects behave as though the Holt and Laury task is an investment decision while the Deal or No Deal task is a gambling decision. |
| Keywords: | Risk Attitudes, Risk Taking Behavior, Personality Traits, Laboratory Experiments. |
| JEL: | C9 D8 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0801&r=upt |