nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2008‒06‒21
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Calibration Results for Non-Expected Utility Theories By Zvi Safra; Uzi Segal
  2. Calibration Results for Betweenness Functionals By Zvi Safra; Uzi Segal
  3. Determinants of In-group Bias: Group Affiliation or Guilt-aversion? By Werner Güth; Matteo Ploner; Tobias Regner
  4. Investment, Resolution of Risk, and the Role of Affect By Frans van Winden; Michal Krawczyk; Astrid Hopfensitz
  5. The Nash Bargaining Solution vs. Equilibrium in a Reinsurance Syndicate By Aase, Knut K.
  6. Measurable Ambiguity By Faruk Gul; Wolfgang Pesendorfer
  7. Does respondent uncertainty explain framing effects in double bounded contingent valuation? By Stephane Luchini; Verity Watson

  1. By: Zvi Safra (Tel Aviv University); Uzi Segal (Boston College)
    Abstract: Rabin [22] proved that a low level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. Rabin’s arguments strongly depend on expected utility theory, but we show that similar arguments apply to general non-expected utility theories.
    Keywords: risk aversion, betweenness, calibration, non-expected utility theories
    Date: 2008–05–18
  2. By: Zvi Safra (Tel Aviv University); Uzi Segal (Boston College)
    Abstract: A reasonable level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. This was demonstrated by Rabin for expected utility theory. Later, Safra and Segal extended this result by showing that similar arguments apply to almost all non-expected utility theories, provided they are Gateaux differentiable. In this paper we drop the differentiability assumption and by restricting attention to betweenness theories we show that much weaker conditions are sufficient for the derivation of similar calibration results.
    Keywords: risk aversion, betweenness
    Date: 2008–05–18
  3. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Matteo Ploner (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Tobias Regner (Friedrich Schiller University, Jena, Germany)
    Abstract: In-group favoritism in social dilemma situations is one of the main findings of studies in Social Identity Theory. We investigate what causes the in-group bias: is it due to mere group affiliation or, alternatively, is guilt-aversion a possible explanation? We induce group membership in a minimal group setting, observe in-/out-group transfers and elicit re- spective beliefs. We ?nd that mere group affiliation affects beliefs and explains a substantial part of the bias, but we also ?nd evidence in favor of guilt-aversion as a source of motivation.
    Keywords: social preferences, experiments, social dilemma, group identity, guilt aversion
    JEL: C72 D01 C91 C92 D84
    Date: 2008–06–10
  4. By: Frans van Winden (University of Amsterdam, CEPR, CESifo); Michal Krawczyk (University of Amsterdam); Astrid Hopfensitz (TSE (GREMAQ), University of Toulouse)
    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: Investment decision; delayed resolution of risk; emotions; experiment
    JEL: C91 D81 G11
    Date: 2008–05–15
  5. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We compare the Nash bargaining solution in a reinsurance syndicate to the competitive equilibrium allocation, focusing on uncertainty and risk aversion. Restricting attention to proportional reinsurance treaties, we find that, although these solution concepts are very different, one may just appear as a first order Taylor series approximation of the other, in certain cases. This may be good news for the Nash solution, or for the equilibrium allocation, all depending upon one’s point of view. <p> Our model also allows us to readily identify some properties of the equilibrium allocation not be shared by the bargaining solution, and vice versa, related to both risk aversions and correlations.
    Keywords: Nash’s Bargaining Solution; Equilibrium; Pareto Optimal Risk Exchange; Reinsurance Treaties; Uncertainty; Risk Aversion; Correlations; Multinormal Universe
    JEL: C10 D81 G22
    Date: 2008–05–30
  6. By: Faruk Gul; Wolfgang Pesendorfer
    Date: 2008–06–09
  7. By: Stephane Luchini (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); Verity Watson (Health Economics Research Unit - University of Aberdeen)
    Abstract: Many stated preference studies have reported framing effects in responses to valuation questions. This occurs when respondents use irrelevant information contained in a question to help them value the good. We investigate if respondent uncertainty can explain two commonly observed framing effects in contingent valuation studies. Specifically using a double bounded dichotomous choice elicitation format, we investigate anchoring (or starting-point bias) and the shift effect, which may indicate if the method is incentive compatible. Respondent uncertainty is measured using a follow up question that asks respondents their certainty about their valuation. We ?nd evidence that the anchoring effect is stronger for respondents expressing uncertainty about their valuation compared to respondents expressing certainty. The shift effect is significant and negative only for respondents expressing certainty. Our findings suggest that anchoring can be reduced if respondents are certain of their valuation, and that iterative elicitation formats are not incentive compatible.
    Keywords: Contingent valuation, heterogeneous framing, self-reported uncertainty
    Date: 2008–06–06

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