
on Utility Models and Prospect Theory 
By:  Sophie Jallais (PHARE  Pôle d'Histoire de l'Analyse et des Représentations Economiques  CNRS : FRE2541  Université PanthéonSorbonne  Paris I  Université de Paris X  Nanterre); PierreCharles Pradier (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I, SAMOS  Statistique Appliquée et MOdélisation Stochastique  Université PanthéonSorbonne  Paris I); David Teira (Dpto. de Lógica, Historia y Filosofía de la ciencia. UNED  uned) 
Abstract:  In this paper we want to explore an argumentative pattern that provides a normative justification for expected utility functions grounded on empirical evidence, showing how it worked in three different episodes of their development. The argument claims that we should prudentially maximize our expected utility since this is the criterion effectively applied by those who are considered wisest in making risky choices (be it gamblers or businessmen). Yet, to justify the adoption of this rule, it should be proven that this is empirically true: i.e., that a given function allows us to predict the choices of that particular class of agents. We show how expected utility functions were introduced and contested in accordance to this pattern in the 18th century and how it recurred in the 1950s when M. Allais made his case against the neobernoullians. 
Keywords:  Expected utility;Normative theory; 
Date:  2008–05 
URL:  http://d.repec.org/n?u=RePEc:hal:papers:halshs00274361_v1&r=upt 
By:  Dillenberger, David 
Abstract:  Experimental evidence suggests that individuals are more risk averse when they perceive risk gradually. We address these findings by studying a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time. DM has preferences for oneshot resolution of uncertainty if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic preferences for oneshot resolution of uncertainty and static preferences that are identified with the behavior observed in Allaistype experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, preferences for oneshot resolution of uncertainty capture narrow framing. 
JEL:  D81 D80 
Date:  2008–04–09 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:8342&r=upt 
By:  Audrey Hu (University of Amsterdam); Liang Zou (University of Amsterdam) 
Abstract:  This paper characterizes the optimal firstprice auction (FPA) and secondprice auction (SPA) for selling rights, contracts, or licenses that involve ensuing payoff uncertainty for the winning bidder. The distribution of the random payoff is common knowledge, except that bidders have private degrees of aversion to downsiderisk. In this model, the optimal FPA entails a lower reserve price, a higher expected revenue, and higher expected utilities for at least some or all bidders than the optimal SPA does, which suggests that FPA dominates SPA in terms of both allocative and Pareto efficiency. Increasing risk or risk aversion generally leads to lower equilibrium bids. 
Keywords:  auction; downside risk; risk aversion; payoff uncertainty; allocative efficiency; Pareto efficiency 
JEL:  D44 
Date:  2008–04–21 
URL:  http://d.repec.org/n?u=RePEc:dgr:uvatin:20080044&r=upt 
By:  Matthias KrÃ¤kel (University of Bonn, Adenauerallee 2442, D53113 Bonn, Germany, tel: +49 228 733914, fax: +49 228 739210, email: m.kraekel@unibonn.de); Petra Nieken (University of Cologne, HerbertLewinStr. 2, D50931 KÃ¶ln, Germany, tel: +49 221 4706310, fax: +49 221 4705078, email: petra.nieken@unikoeln.de); Judith Przemeck (University of Bonn, Adenauerallee 2442, D53113 Bonn, Germany, tel: +49 228 739213, fax: +49 228 739210, email: judith.przemeck@unibonn.de) 
Abstract:  We analyze a twostage 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 winnertakeall 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 taking risk. 
Keywords:  Tournaments, Competition, RiskTaking, Experiment 
JEL:  M51 C91 D23 
Date:  2008–03 
URL:  http://d.repec.org/n?u=RePEc:trf:wpaper:233&r=upt 
By:  Alain Ayong Le Kama (EQUIPPE  Université de Lille I); Cuong Le Van (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I, Ecole d'économie de Paris  Paris School of Economics  Université PanthéonSorbonne  Paris I); Katheline Schubert (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I, Ecole d'économie de Paris  Paris School of Economics  Université PanthéonSorbonne  Paris I) 
Abstract:  There are two main approaches for defining social welfare relations for an economy with infinite horizon. The first one is to consider the set of intertemporal utility streams generated by a general set of bounded consumptions and define a preference relation between them. This relation is ideally required to satisfy two main axioms, the Pareto axiom, which guarantees efficiency and the Anonymity axiom, which guarantees equity. Basu and Mitra (2003) show that it is impossible to represent by a function a preference relation embodying both requirements, and Basu and Mitra (2007) propose and characterize a new welfare criterion called utilitarian social welfare relation. In the same framework, Chichilnisky (1996) proposes two axioms that capture the idea of sustainable growth : nondictatorship of the present and nondictatorship of the future, and exhibits a mixed criterion, adding a discounted utilitarian part, which gives a dictatorial role to the present, and a long term part, which gives a dictatorial role to the future. The drawback of Chichilnisky's approach is that it often does not allow to explicity characterize optimal growth paths with optimal control techniques. Our aim is less general than Chichilnisky's and Basu and Mitra's : we want to have a nondictatorial criterion for optimal growth models. We restrict ourselves to the set of utilities of consumptions which are generated by a specific technology. We show that the undiscounted utilitarian criterion pioneered by Ramsey (1928) is not only convenient if one wants to solve an optimal growth problem but also sustainable, efficient and equitable. 
Keywords:  Anonymity, intergenerational equity, natural resources, nondictatorship of the future, nondictatorship of the present, optimal growth models, Pareto, social welfare function, social welfare relation, sustainability, utilitarian undiscounted criterion. 
Date:  2008–04 
URL:  http://d.repec.org/n?u=RePEc:hal:papers:halshs00275758_v1&r=upt 
By:  Barnett, Richard C; Bhattacharya, Joydeep; Bunzel, Helle 
Abstract:  This note studies a model in which heterogeneous income agents get a utility jolt only when their consumption catches up with the Joneses'. The resulting utility function is nonconcave. In this setup, participation in a fair lottery has the potential to make some agents better off in an exante sense even as it makes them financially vulnerable. More incomediverse people join the lottery pool when the `kick' from catching up increases. Worsening income inequality may increase the number of financially vulnerable people. The analysis sheds light on some aspects of the ongoing subprime mortgage crisis. 
Keywords:  catching up with the Joneses, housing crisis, consumption externalities, nonconcave utility, lotteries, inequality 
JEL:  D0 
Date:  2008–04–17 
URL:  http://d.repec.org/n?u=RePEc:isu:genres:12909&r=upt 
By:  Cespa, Giovanni; Foucault, Thierry 
Abstract:  We consider a multiperiod rational expectations model in which riskaverse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in realtime whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative externality on other investors. Thus, investors’ average welfare is maximal when access to price information is rationed. We show that a market for price information can implement the fraction of insiders that maximizes investors’ average welfare. This market features a high price to curb excessive acquisition of ticker information. We also show that informational efficiency is greater when the dissemination of ticker information is broader and more timely. 
Keywords:  Hirshleifer effect; Market data sales; Price discovery; Transparency 
JEL:  G10 G14 
Date:  2008–04 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:6794&r=upt 
By:  Ludovic Renou; Ralph C. Bayer 
Abstract:  Homo Strategicus populates the vast plains of Game Theory. He knows all logical implications of his knowledge (logical omniscience) and chooses optimal strategies given his knowledge and beliefs (rationality). This paper investigates the extent to which the logical capabilities of Homo Sapiens Sapiens resemble those possessed by Homo Strategicus. Controlling for otherregarding preferences and beliefs about the rationality of others, we show, in the laboratory, that the ability of Homo Sapiens Sapiens to perform complex chains of iterative reasoning is much better than previously thought. Subjects were able to perform about three iterations of reasoning on average. 
Keywords:  iterative reasoning; depth of reasoning; logical omniscience; rationality; experiments; otherregarding preferences 
JEL:  C70 C91 
Date:  2008–04 
URL:  http://d.repec.org/n?u=RePEc:lec:leecon:08/16&r=upt 