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on Utility Models and Prospect Theory |
| By: | Schied, Alexander; Schoeneborn, Torsten |
| Abstract: | We consider the infinite-horizon optimal portfolio liquidation problem for a von Neumann-Morgenstern investor in the liquidity model of Almgren (2003). Using a stochastic control approach, we characterize the value function and the optimal strategy as classical solutions of nonlinear parabolic partial differential equations. We furthermore analyze the sensitivities of the value function and the optimal strategy with respect to the various model parameters. In particular, we find that the optimal strategy is aggressive or passive in-the-money, respectively, if and only if the utility function displays increasing or decreasing risk aversion. Surprisingly, only few further monotonicity relations exist with respect to the other parameters. We point out in particular that the speed by which the remaining asset position is sold can be decreasing in the size of the position but increasing in the liquidity price impact. |
| Keywords: | Liquidity; illiquid markets; optimal liquidation strategies; dynamic trading strategies; algorithmic trading; utility maximization |
| JEL: | G12 G33 G24 G10 G20 |
| Date: | 2008–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7105&r=upt |
| By: | Jeff Richardson (Centre for Health Economics, Monash University); John McKie (Centre for Health Economics, Monash University); Stuart Peacock (British Columbia Cancer Agency, Vancouver, British Columbia, Canada); Angelo Iezzi (Centre for Health Economics, Monash University) |
| Abstract: | The measure of benefit in cost utility analysis (CUA) is the increase in utility which is attributable to a health service. This paper reviews the evidence that the severity of an illness – the health state before receipt of the health service – may be independently important for social (as distinct from individual) preferences for different services. An earlier 1997 Australian study is summarised. Data from a 2004 survey are used to quantify the apparent importance of severity. Person trade off (PTO) scores are used to measure social preferences and time trade off (TTO) scores to measure individual preferences. Econometric results suggest the severity may more than double the index of social value of a health service. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:mhe:cherps:2007-18&r=upt |
| By: | Jeff Richardson (Centre for Health Economics, Monash University); Stuart Peacock (British Columbia Cancer Agency, Vancouver, British Columbia, Canada); Angelo Iezzi (Centre for Health Economics, Monash University); Neil Day (Centre for Program Evaluation, University of Melbourne); Graeme Hawthorne (Department of Psychiatry, University of Melbourne) |
| Abstract: | MAU instruments seek to measure the ‘utility’ of health states in a way suitable for use in economic evaluation studies and, in particular, cost utility analysis (CUA). The Assessment of Quality of Life, Mark 2 (AQoL 2) project was undertaken specifically to increase the sensitivity of measurement in the region of full health, where most other instruments, including the earlier AQoL 1 instrument are relatively insensitive. In sum, the AQoL 2 instrument estimates utility using a three stage procedure. Items are (i) weighted and combined using a multiplicative model to obtain dimension scores; (ii) these are similarly weighted and combined to obtain an initial AQoL score; (iii) this is then transformed econometrically to produce the final estimate of a health state utility. As with AQoL 1 the research program also sought to experiment with new methods for achieving this. AQoL 1 was the first instrument to use a multi level descriptive system with five dimensions of health separately modelled and then combined. After experimentation it incorporated a new way of modelling the utility of health states worse than death. AQoL 2 adopted this same multi level structure It was developed in 2 stages. The first used a series of confirmatory factor analysis using Lisrel, to construct dimension models. The second was a confirmatory factor (SEM) analysis of the overall AQoL which combined all of the dimensions. Utility scores were modelled in three stages. Time trade-off (TTO) importance weights were first combined into dimensions and to the dimensions into a single score using multiplicative (non stochastic) models (as with AQoL 1). However these were subsequently adjusted in a third stage econometric ‘correction’ based upon independently collected multi attribute – TTO – scores. |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:mhe:cherps:2007-17&r=upt |
| By: | SPRUMONT, Yves |
| Abstract: | We study the problem of defining inequality-averse social orderings over the space of allocations in a multi-commodity environment where individuals differ only in their preferences. We formulate notions of egalitarianism based on the axiom that any dominance between the consumption bundles of two individuals should be reduced. This Dominance Aversion requirement is compatible with Consensus, a weak version of the Pareto principle saying that an allocation y is better than x whenever everybody finds that everyone's bundle at y is better than at x. We identify two families of multidimensional leximin orderings satisfying Dominance Aversion and Consensus. We also discuss weaker forms of egalitarianism based on a new definition of multidimensional Lorenz dominance. |
| JEL: | D63 D71 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2007-03&r=upt |
| By: | Claudia R. Sahm |
| Abstract: | Stability of preferences is central to how economists study behavior. This paper uses panel data on hypothetical gambles over lifetime income in the Health and Retirement Study to quantify changes in risk tolerance over time and differences across individuals. The maximum-likelihood estimation of a correlated random effects model utilizes information from 12,000 respondents in the 1992-2002 HRS. The results support constant relative risk aversion and career selection on preferences. While risk tolerance changes with age and macroeconomic conditions, persistent differences across individuals account for 73% of the systematic variation. The measure of risk tolerance also relates to actual stock ownership. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-66&r=upt |
| By: | Geoffroy Enjolras; Robert Kast |
| Abstract: | This paper proposes a combination of participating and financial contracts in order to hedge catastrophic risk. Assuming unfair policies and the existence of a basis risk, we prove the optimal coverage is realized using: first, a participating contract, which covers the idiosyncratic part of the risk under a variable premium; second, a financial contract, which hedges the systemic part of the risk under a fixed premium. The necessary intermediation of insurance companies in the conception of such contracts is emphasized as well as the impact of unfair premia. From then, potential implications for crop risk management are examined. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:08-01&r=upt |
| By: | Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich); Donata Bessey (Institute for Strategy and Business Economics, University of Zurich); Kerstin Pull (Eberhard Karls Universitaet Tuebingen); Simone Tuor (Institute for Strategy and Business Economics, University of Zurich) |
| Abstract: | In this survey article, we review results from behavioural and experimental economics that have a potential application in the field of personnel economics. While personnel economics started out with a “clean” economic perspective on human resource management (HRM), recently it has broadened its perspective by increasingly taking into account the results from laboratory experiments. Besides having inspired theory-building, the integration of behavioural economics into personnel economics has gone hand in hand with a strengthening of empirical analyses (field experiments and survey data) complementing the findings from the laboratory. Concentrating on employee compensation as one particular field of application, we show that for personnel economics there is indeed much to be learnt from the recent developments in behavioural economics. Moreover, integrating behavioural economics into personnel economics bears the chance of eventually reconciling personnel economics and “classic” HRM analysis that has a long tradition of relying on social psychology as a classical point of reference. |
| Keywords: | Behavioural Economics, Personnel Economics |
| JEL: | J3 M52 C9 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:iso:wpaper:0077&r=upt |
| By: | Bossert, Walter; Suzumura, Kotaro |
| Abstract: | Ever since Sen (1993) criticized the notion of internal consistency of choice, there exists a wide spread perception that the standard rationalizability approach to the theory of choice has difficulties coping with the existence of external social norms. This paper introduces a concept of norm-conditional rationalizability and shows that external social norms can be accommodated so as to be compatible with norm-conditional rationalizability by means of suitably modified revealed preference axioms in the theory of rational choice on general domains à la Richter (1966;1971) and Hansson (1968) |
| JEL: | D11 D71 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2007-07&r=upt |