nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2008‒05‒05
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Looking Awkward When Winning and Foolish When Losing: Inequity Aversion and Performance in the Field By Benno Torgler; Markus Schaffner; Bruno S. Frey; Sascha L. Schmidt
  2. Stochastic Discount Factor Approach to International Risk-Sharing: A Robustness Check of the Bilateral Setting By Metodij Hadzi-Vaskov; Clemens J.M. Kool
  3. The Toll of Subrational Trading in an Agent Based Economy By Paolo Pellizzari
  4. Stable Allocations of Risk By Péter Csóka; P. Jean-Jacques Herings; László Á. Kóczy

  1. By: Benno Torgler; Markus Schaffner; Bruno S. Frey; Sascha L. Schmidt
    Abstract: The experimental literature and studies using survey data have established that people care a great deal about their relative economic position and not solely, as standard economic theory assumes, about their absolute economic position. Individuals are concerned about social comparisons. However, behavioral evidence in the field is rare. This paper provides an empirical analysis testing the model of inequity aversion using two unique panel data sets for basketball and soccer players. We find support that the concept of inequity aversion helps to understand how the relative income situation affects performance in a real competitive environment with real tasks and real incentives.
    Keywords: Inequity aversion; relative income; positional concerns; envy; social comparison; performance; interdependent preferences
    JEL: D00 D60 L83
    Date: 2008–04
  2. By: Metodij Hadzi-Vaskov; Clemens J.M. Kool
    Abstract: This paper presents a robustness check of the stochastic discount factor approach to international (bilateral) risk-sharing given in Brandt, Cochrane, and Santa-Clara (2006). We demonstrate two main inherent limitations of the bilateral SDF approach to international risk-sharing. First, the discount factors are not uniquely determined in the bilateral framework and crucially depend on the partner country included in the calculations. Second, the deviations between the discount factors obtained in this way (the imprecision in the measurement of marginal utility growth) are larger for countries whose stock market excess return shocks are relatively less important. In order to account for some of these criticisms, we extend the bilateral into a three-country setting. Although the trilateral framework demonstrates that the (final) results for the international risk-sharing index are quite robust to the number of countries used in their calculation, it does not resolve the inherent incoherence found in the bilateral SDF approach.
    Keywords: International Risk-Sharing, Stochastic Discount Factor, Exchange Rate Volatility
    JEL: F31 G12 G15
    Date: 2008–03
  3. By: Paolo Pellizzari
    Abstract: In an agent-based exchange economy, we measure the loss of wealth for rational agents due to the presence of varying proportions of subrational (boundedly rational) traders that do not know all the needed parameters. We consider two departures from rationality: M-traders use private, stochastic and unbiased signals to build an estimate of the value of the risky asset; chartists only use the last observed price. The exchange takes place using a realistic continuous double auction. We show by numerical simulations that M-traders? subrational behavior does not reduce the wealth of the rational agents. On the contrary, a sizable fraction of chartists can lead to mispricing of the risky asset and to a reduction of the wealth share of the rational traders. Moreover, as chartists perceive a higher wealth than the others, due to wrong estimates of the fundamental value, their fraction in the market may not dissolve in the long run.
    Keywords: risk sharing; boundedly rationality; cost of subrational trading; agent-based markets
    Date: 2008–03–01
  4. By: Péter Csóka (Department of Economics, Maastricht University); P. Jean-Jacques Herings (Department of Economics, Maastricht University); László Á. Kóczy (Budapest Tech)
    Abstract: The measurement and the allocation of risk are fundamental problems of portfolio management. Coherent measures of risk provide an axiomatic approach to the former problem. In an environment given by a coherent measure of risk and the various portfolios' realization vectors, risk allocation games aim at solving the second problem: How to distribute the diversification benefts of the various portfolios? Un- derstanding these cooperative games helps us to find stable, efficient,and fair allocations of risk. We show that the class of risk allocation and totally balanced games coincide, hence a stable allocation of risk is always possible. When the aggregate portfolio is riskless, the class of risk allocation games coincides with the class of exact games. As in exact games any subcoalition may be subject to marginalization even in core allocations, our result further emphasizes the responsibility involved in allocating risk.
    Keywords: Coherent Measures of Risk, Risk Allocation Games, Totally Balanced Games, Exact Games
    JEL: C71 G10
    Date: 2007–06

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