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on Utility Models and Prospect Theory |
| By: | Renaud Bourlès (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Dominique Henriet (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | This paper examines the impact of risk heterogeneity and asymmetric information on mutual risk-sharing agreements. It displays the optimal incentive compatible sharing rule in a simple two-agent model with two levels of risk. When individual risk is public information, equal sharing of wealth is not achievable when risk heterogeneity is too large or when risk aversion is too low. However the mutualization principle still holds as agents only bear aggregate risk. This result no longer holds when risk is private information. Moreover, the asymmetry of information (i) makes equal sharing unsustainable when both individuals are low risk types (ii) induces some exchanges when agents have the same level of initial wealth and (iii) induces changes in the direction of transfer with respect to the complete information benchmark in some states of nature when risk types are independent and absolute risk aversion is decreasing and convex. |
| Keywords: | Mutual agreements; Asymmetric information; Mechanism Design |
| Date: | 2008–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00278178_v1&r=upt |
| By: | Brekke, Kjell Arne (Department of Economics, University of Oslo); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This paper attempts to bring some central insights from behavioural economics into the economics of climate change. In particular, it discusses (i) implications of prospect theory, the equity premium puzzle and time inconsistent preferences in the choice of discount rate used in climate change cost assessments, and (ii) the implications of various kinds of social preferences for the outcome of climate negotiations. Several reasons are presented for why it appears advisable to choose a substantially lower social discount rate than the average return on investments. It also seems likely that taking social preferences into account increases the possibilities of obtaining international agreements, compared to the standard model. However, there are also effects going in the opposite direction, and the importance of sanctions is emphasised.<p> |
| Keywords: | Behavioural economics; prospect theory; equity premium puzzle; social preferences; climate negotiations. |
| JEL: | D63 Q54 |
| Date: | 2008–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0305&r=upt |
| By: | Jose Apesteguia; Miguel A. Ballester |
| Abstract: | A choice function is sequentially rationalizable if there is an ordered collection of asymmetric binary relations that identifies the selected alternative in every choice problem. We propose a property, F-consistency, and show that it characterizes the notion of sequential rationalizability. F-consistency is a testable property that highlights the behavioral aspects implicit in sequentially rationalizable choice. Further, our characterization result provides a novel tool with which to study how other behavioral concepts are related to sequential rationalizability, and establish a priori unexpected implications. In particular, we show that the concept of rationalizability by game trees, which, in principle, had little to do with sequential rationalizability, is a refinement of the latter. Every choice function that is rationalizable by a game tree is also sequentially rationalizable. Finally, we show that some prominent voting mechanisms are also sequentially rationalizable. |
| Keywords: | Individual rationality, Rationalizability, Consistency, Bounded rationality, Behavioral economics, Voting |
| JEL: | B41 D01 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1089&r=upt |
| By: | Fousseni Chabi-Yo; Eric Ghysels; Eric Renault |
| Abstract: | The early work of Tobin (1958) showed that portfolio allocation decisions can be reduced to a two stage process: first decide the relative allocation of assets across the risky assets, and second decide how to divide total wealth between the risky assets and the safe asset. This so called twofund separation relies on special assumptions on either returns or preferences. Tobin (1958) analyzed portfolio demand in a mean-variance setting. We revisit the fund separation in settings that allow not only for heterogeneity of preferences for higher order moments, but also for heterogeneity of beliefs among agents. To handle the various sources of heterogeneity, beliefs, and preferences, we follow the framework of Samuelson (1970) and its recent generalization by Chabi-Yo, Leisen, and Renault (2006). This generic approach allows us to derive, for risks that are infinitely small, optimal shares of wealth invested in each security that coincide with those of a Mean-Variance-Skewness-Kurtosis optimizing agent. Besides the standard Sharpe-Lintner CAPM mutual fund separation we obtain additional mutual funds called beliefs portfolios, pertaining to heterogeneity of beliefs, a skewness portfolio similar to Kraus and Litzenberger (1976), beliefs about skewness portfolios with design quite similar to beliefs portfolios, a kurtosis portfolio, and finally portfolio heterogeneity of the preferences for skewness across investors in the economy as well as its covariation with heterogeneity of beliefs. These last two mutual funds are called cross-co-skewness portfolio and cross-co-skewness-beliefs portfolios. Under various circumstances related to return distribution characteristics, cross-agent heterogeneity and market incompleteness, some of these portfolios disappear. |
| Keywords: | Financial markets; Market structure and pricing |
| JEL: | C52 D58 G11 G12 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-16&r=upt |
| By: | Stefanescu, Razvan |
| Abstract: | This paper examines, in the tradition of descriptive approaches of decision-making, how Romanian executives actually make decisions. It is based on an investigation in which managers from Romania were interrogated about some aspects of the decision-making. The conclusion of this study is that the Romanian managers don’t follow all the recommendations of classical decision theory when they make decisions. That situation is caused not only by the high instability of business environment, but also by some elements of the managerial culture. |
| Keywords: | descriptive approaches of decision-making; business environment; investigation among executives; transition countries; |
| JEL: | D21 D81 M10 |
| Date: | 2004–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8791&r=upt |