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on Utility Models and Prospect Theory |
| By: | Kristof Bosmans |
| Abstract: | We propose a straightforward dominance procedure for comparing social welfare orderings (SWOs) with respect to the degree of inequality aversion they express. We consider three versions of the procedure: (i) a criterion based on the Lorenz quasi-ordering which we argue to be the ideal version, (ii) a criterion based on a minimalist concept of inequality, and (iii) a criterion based on the relative differentials quasi-ordering. It turns out that the traditional Arrow-Pratt approach is equivalent to the latter two criteria for important classes of SWOs, but that it is profoundly inconsistent with the Lorenz-based criterion. With respect to the problem of combining extreme inequality aversion and monotonicity, criteria (ii) and (iii) identify as extremely inequality averse a set of SWOs that includes leximin as a special case, whereas the Lorenz-based criterion concludes that extreme inequality aversion and monotonicity are incompatible. |
| Keywords: | Inequality Aversion, Lorenz, Leximin, Maximin, Risk Aversion |
| JEL: | D63 D81 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0517&r=upt |
| By: | Kristof Bosmans |
| Abstract: | We discuss a property of quasi-concavity for inequality measures. Defining income distributions as relative frequency functions, this property says that a convex combination of any two given income distributions is weakly more unequal than the least unequal income distribution of the two. The quasi-concavity property is not essential to the idea of inequality comparisons in the sense of not being implied by the fundamental, i.e., Lorenz type, axioms on their own. However, it is shown that all inequality measures considered in the literature—i.e., the class of decomposable inequality measures and the class of normative inequality measures based on a social welfare function of the rank-dependent expected utility form—satisfy the property and even a stronger version). The quasi-concavity property is then shown to greatly reduce the possible inequality patterns over a much studied type of income growth process. |
| Keywords: | Inequality, Quasi-Concavity, Growth, Rank-Dependent Expected Utility |
| JEL: | D31 D63 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0507&r=upt |
| By: | Anisha Ghosh; Christian Julliard |
| Abstract: | Probably not. First, allowing the probabilities attached to the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected by the data and requires a very high level of Relative Risk Aversion (RRA) in order to rationalize the stock market risk premium. This result holds for a variety of data sources and samples - including ones starting as far back as 1890. Second, we elicit the likelihood of observing an Equity Premium Puzzle (EPP) if the data were generated by the rare events probability distribution needed to rationalize the puzzle with a low level of RRA. We find that the historically observed EPP would be very unlikely to arise. Third, we find that the rare events explanation of the EPP significantly worsens the ability of the Consumption-CAPM to explain the cross-section of asset returns. This is due to the fact that, by assigning higher probabilities to bad - economy wide - states in which consumption growth is low and all the assets in the cross-section tend to yield low returns, the rare events hypothesis reduces the cross-sectional dis-persion of consumption risk relative to the cross-sectional variation of average returns. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp610&r=upt |
| By: | Matthias Kräkel; Petra Nieken; Judith Przemeck |
| Abstract: | We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when takin risk. |
| Keywords: | Tournaments; Competition; Risk-Taking; Experiment |
| JEL: | M51 C91 D23 |
| Date: | 2008–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse7_2008&r=upt |
| By: | Charles Goodhart |
| Abstract: | My first-ever essay into quasi-independent research involved an attempt to understand, explain and even possibly extend G.L.S. Shackle’s model of decision-making under uncertainty. Undergraduates at Cambridge who had done well in Part 1 of the Economics Tripos were encouraged to participate in a joint student/Faculty seminar, called – as I recall – the Monday Club, and each Monday evening of term one of the undergraduates, chosen by drawing lots, was expected to present a paper. Anyhow when I drew my turn, I constructed a three dimensional graph, out of green plasticine, of Shackle’s focus gain and focus loss, potential surprise, and all that. I recollect that the marks for technical merit were higher than those for artistic ability. The approximate date of that presentation was November 1958. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp178&r=upt |