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on Utility Models and Prospect Theory |
| By: | Moez Abouda (Centre d'Economie de la Sorbonne et BESTMOD de Tunis) |
| Abstract: | La Vallée (1968), in the expected utility model, gives a sufficient condition for positivity of the bid-selling spread. In this article, we show that this sufficient condition, namely decreasing absolute risk aversion (DARA) is in fact necessary. Moreover, we prove that the expected utility hypothesis and differentiability of the utility function are not required. |
| Keywords: | DARA, NARA, Bid-selling spread, perfect hedging, risk premium. |
| JEL: | D80 D81 G12 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:b08024&r=upt |
| By: | Richard Cornes; Roger Hartley |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0806&r=upt |
| By: | Daniela Raeva; Luigi Mittone; Jens Schwarzbach |
| Abstract: | Theoretical and empirical body of research have exposed the powerful role of experiencing regret in guiding choice behavior. In this paper, we examined the impact of experienced regret (and rejoicing) induced by a feedback provided on a risk decision prior to a two-period intertemporal choice (i.e. decision-unrelated experienced regret). To our knowledge, this is the first attempt to bring together experienced regret and choice over time.We used the two-component discounted utility model approach as a framework. We applied previous research findings on the effect of experienced regret on utility, and we performed an experiment to test whether experienced decision-unrelated regret and rejoicing have an impact on the discount factor. We found that both experienced decisionunrelated regret and rejoicing have an impact on the way people discount future: when regret is experienced the discount factor decreases, whereas when rejoicing is experienced the discount factor increases. |
| Keywords: | intertemporal choice, regret theory |
| JEL: | A12 C91 D91 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpce:0804&r=upt |
| By: | John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian |
| Abstract: | Revealed preferences are tastes that rationalize an economic agent’s observed actions. Normative preferences represent the agent's actual interests. It sometimes makes sense to assume that revealed preferences are identical to normative preferences. But there are many cases where this assumption is violated. We identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences: passive choice, complexity, limited personal experience, third- party marketing, and intertemporal choice. We then discuss six approaches that jointly contribute to the identification of normative preferences: structural estimation, active decisions, asymptotic choice, aggregated revealed preferences, reported preferences, and informed preferences. Each of these approaches uses consumer behavior to infer some property of normative preferences without equating revealed and normative preferences. We illustrate these issues with evidence from savings and investment outcomes. |
| JEL: | A11 B4 D01 D60 G11 H1 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13976&r=upt |
| By: | PROTOPOPESCU DAN |
| Abstract: | The objective of this paper is to re-evaluate the attitude to effort of a risk-averse decision-maker in an evolving environment. In the classic analysis, the space of efforts is generally discretized. More realistic, this new approach emploies a continuum of effort levels. The presence of multiple possible efforts and performance levels provides a better basis for explaining real economic phenomena. The traditional approach (see, Laffont, J. J. & Tirole, J., 1993, Salanie, B., 1997, Laffont, J.J. and Martimort, D, 2002, among others) does not take into account the potential effect of the system dynamics on the agent's behavior to effort over time. In the context of a Principal-agent relationship, not only the incentives of the Principal can determine the private agent to allocate a good effort, but also the evolution of the dynamic system. The incentives can be ineffective when the environment does not incite the agent to invest a good effort. This explains why, some effici |
| Keywords: | Controlled stochastic environment, optimal trajectory, closed-loop strategy, rational decision-maker, endogenous dynamic active learning, adaptive effort management, optimal effort threshold, effort aversion, excessive behavior, learning of preferences. |
| JEL: | C91 D78 D82 D83 |
| Date: | 2008–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:739.08&r=upt |
| By: | U. Witt; C. Schubert |
| Abstract: | In constitutional political economy, the citizens’ constitutional interests determine the social contract that is binding for the post-constitutional market game. However, following traditional preference subjectivism, it is left open what the constitutional interest are. Using the example of risk attitudes, we argue that this approach is too parsimonious with regard to the behavioral foundations to support a calculus of consent. In face of innovative activities with pecuniary and technological externalities in the post-constitutional phase, the citizens’ constitutional interests vary with their risk preferences. To determine what kind of social contract is generally agreeable, specific assumptions about risk preferences are needed. |
| Keywords: | constitutional preferences, social contract, original position, innovation, risk preferences Length 34 pages |
| JEL: | D72 H10 O33 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:esi:evopap:2008-03&r=upt |
| By: | Andreas Glöckner (Max Planck Institute for Research on Collective Goods, Bonn); Tilmann Betsch (University of Erfurt) |
| Abstract: | It has been repeatedly shown that in decisions under time constraints, individuals predominantly use noncompensatory strategies rather than complex compensatory ones. We argue that these findings might be due not to limitations of cognitive capacity but instead to limitations of information search imposed by the commonly used experimental tool Mouselab (Payne et al., 1988). We tested this assumption in three experiments. In the first experiment, information was openly presented, whereas in the second experiment the standard Mouselab program was used under different time limits. The results indicate that individuals are able to compute weighted additive decision strategies extremely quickly if information search is not restricted by the experimental procedure. In a third experiment, these results were replicated using more complex decision tasks, and the major alternative explanations that individuals use more complex heuristics or merely encode the constellation of cues were ruled out. In sum, the findings challenge the fundaments of bounded rationality and highlight the importance of automatic processes in decision making. |
| Keywords: | Automatic Information Integration, One Reason Decision Making, Mouselab, Probabilistic Inferences, Process Tracing, Time Limits, Intuition |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2008_12&r=upt |
| By: | Hopfensitz, Astrid; Krawczyk, Michal; van Winden, Frans A.A.M. |
| Abstract: | This experimental study is concerned with the impact of the timing of the resolution of risk on people’s willingness to take risks, with a special focus on the role of affect. While the importance of anticipatory emotions has so far been only inferred from decisions regarding hypothetical choice problems, we had participants put their own money at risk in a real investment task. Moreover, emotions were explicitly measured, including anticipatory emotions experienced during the waiting period under delayed resolution (which involved two days). Affective traits and risk attitudes were measured through a web-based questionnaire before the experiment and participants’ preferences for resolution timing, risk, and time were incentive compatibly measured during the experiment. Main findings are that delayed resolution can affect investment, that the effect depends on the risk involved, and that (among all the measures considered) only emotions can explain our results, albeit in ways that are not captured by existing models. |
| Keywords: | delayed resolution of risk; emotions; experiment; Investment decision |
| JEL: | C91 D81 G11 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6822&r=upt |