
on Utility Models and Prospect Theory 
By:  Pavlo R. Blavatskyy 
Abstract:  Loss aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of loss aversion to a more general setup where outcomes (consequences) may not be measurable in monetary terms and people may have fuzzy preferences over lotteries, i.e. they may choose in a probabilistic manner. The implications of loss aversion are discussed for expected utility theory and rankdependent utility theory as well as for popular models of probabilistic choice such as the constant error/tremble model and a strong utility model (that includes the Fechner model of random errors and Luce choice model as special cases). 
Keywords:  Loss aversion, more loss averse than, nonmonetary outcomes, probabilistic choice, rankdependent utility theory 
JEL:  D00 D80 D81 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:zur:iewwpx:375&r=upt 
By:  Anat Bracha (Eitan Berglas School of Economics, Tel Aviv University); Donald J. Brown (Dept. of Economics, Yale University) 
Abstract:  We characterize, in the framework for variational preferences, the affective decision making model of choice under risk and uncertainty introduced by Bracha and Brown (2007). This characterization (i) provides a rigorus decisiontheoretic foundation for affective decision making, (ii) offers an axiomatic explanation for ambiguityseeking in the Ellsberg Paradox and (iii) suggests a dual representation of ADM games in terms of the LegendreFenchel conjugate. 
Keywords:  Ellsberg paradox, Schmeidler's axiom, Affective decision making, Variational preferences, LegendreFenchel conjugate 
JEL:  D01 D81 G22 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:cwl:cwldpp:1667&r=upt 
By:  Dan Protopopescu 
Abstract:  The objective of this paper is to correct and improve the results obtained by Van der Ploeg (1984a, 1984b) and utilized in the theoretical literature related to feedback stochastic optimal control sensitive to constant exogenous riskaversion (see, Jacobson, 1973, Karp, 1987 and Whittle, 1981, 1989, 1990, among others) or to the classic context of riskneutral decisionmakers (see, Chow, 1973, 1976a, 1976b, 1977, 1978, 1981, 1993). More realistic and attractive, this new approach is placed in the context of a timevarying endogenous riskaversion which is under the control of the decisionmaker. It has strong qualitative implications on the agent's optimal policy during the entire planning horizon. 
Keywords:  Controlled stochastic environment, rational decisionmaker, adaptive control, optimal path, feedback optimal strategy, endogenous riskaversion, dynamic active learning. 
JEL:  C51 C61 C91 D81 
Date:  2008–06–15 
URL:  http://d.repec.org/n?u=RePEc:aub:autbar:748.08&r=upt 
By:  Hopfensitz, Astrid; Wranik, Tanja 
Abstract:  Each economic actor is characterized by his own evaluations, traits, and strategies. Although heterogeneity of economic actors is widely acknowledged, little is known about the factors causing it. In this paper, we will examine the behavioral bias known as myopic loss aversion, and the environmental and psychological factors leading to different behavioral reactions. Myopic loss aversion has been used to suggest that fund managers should reveal information only rarely, to lead investors to choose options with (on average) higher returns. Specifically, we experimentally studied the impact of experience, individual differences, and emotions on behavioral responses to feedback frequency in an investment setting. Participants made investment decisions in one of three feedback frequency conditions: (1) they received feedback after each round and had the opportunity to make investment changes each time; (2) they received feedback after each round, but were only given the possibility to make changes every three rounds; and (3) they received aggregated feedback every three rounds, and also had the opportunity to make changes every three rounds. We collected information about personality and individual difference factors before the experiment. Finally, evaluations and emotions were measured every three rounds, immediately after feedback was given. We hypothesized that myopic loss aversion is not a general phenomenon, but that stable individual differences lead to different evaluations and emotional reactions concerning feedback. This implies that myopic loss aversion will only be present for some groups of people under certain conditions. As predicted, we found that myopic loss aversion is not generally observed; rather, we found both an experience effect and a personality effect. In particular, myopic loss aversion was particularly likely: (1) when initial investment rounds lead to negative investment experiences (i.e., losses); and (2) for investors with low selfefficacy concerning the investment situation. ‘Self efficacy’ is related to a personality profile characterized by confidence in decisionmaking abilities, high optimism, and low anxiety. Our results may help explain which individual and situational factors lead to myopic loss aversion, and should help researchers and practitioners provide optimal feedback to different types of investment clients. 
Keywords:  myopic loss aversion; risk taking; character traits; self efficacy; emotions; personality 
JEL:  D53 G11 D81 D14 C91 
Date:  2008 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:9305&r=upt 
By:  Quazi Shahriar (Department of Economics, San Diego State University) 
Abstract:  Risk aversion and impatience of either the bidders or the seller have been utilized to explain the popularity of buy prices in private value auctions. This paper, using a pure common value framework, models auctions with “temporary” buy prices. We characterize equilibrium bidding strategies in a general setup and then analyze a seller’s incentive to post a buy price when there are two bidders. We find that, when bidders are either risk neutral or risk averse, a risk neutral seller has no incentive to post a buy price. But when the seller is risk averse, a suitably chosen buy price can raise his expected payoff when the bidders are either risk neutral or risk averse. This provides an explanation for the popularity of buy prices in online common value auctions. 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:sds:wpaper:0031&r=upt 
By:  Peter Csoka (Department Economics, Universiteit of Maastricht); P. JeanJacques Herings, (Department of Economics, Universiteit Maastricht,); Laszlo A. Koczy (Department of Economics, Universiteit Maastricht,) 
Abstract:  Measuring risk can be axiomatized by the concept of coherent measures of risk. A risk environment specifies some individual portfolios' realization vectors and a coherent measure of risk. We consider sharing the risk of the aggregate portfolio by studying transferable utility cooperative games: risk allocation games. We show that the class of risk allocation games coincides with the class of totally balanced games. As a limit case the aggregate portfolio can have the same payoff in all states of nature. We prove that the class of risk allocation games with no aggregate uncertainty coincides with the class of exact games. 
Keywords:  Coherent Measures of Risk, Risk Allocation Games, Totally Balanced Games, Exact Games 
JEL:  C71 
Date:  2007–09 
URL:  http://d.repec.org/n?u=RePEc:has:discpr:0704&r=upt 
By:  Zhou, Jidong 
Abstract:  This paper studies the implications of consumer reference dependence in market competition. If consumers take some product (e.g., the first product they have considered) as the reference point in evaluating others and exhibit loss aversion, then the more "prominent" firm whose product is taken as the reference point by more consumers will randomize its price over a high and a low one. All else equal, this firm will on average earn a larger market share and a higher profit than its rival. The welfare impact is that consumer reference dependence could harm firms and benefit consumers by intensifying price competition. Consumer reference dependence will also shape firms' advertising strategies and quality choices. If advertising increases product prominence, ex ante identical firms may differentiate their advertising intensities. If firms vary in their prominence, the less prominent firm might supply a lowerquality product even if improving quality is costless. 
JEL:  D11 L13 M37 D43 
Date:  2008–05 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:9370&r=upt 
By:  Alberto F. Alesina; Richard T. Holden 
Abstract:  We analyze a model in which voters are uncertain about the policy preferences of candidates. Two forces affect the probability of electoral success: proximity to the median voter and campaign contributions. First, we show how campaign contributions affect elections. Then we show how the candidates may wish to announce a range of policy preferences, rather than a single point. This strategic ambiguity balances voter beliefs about the appeal of candidates both to the median voter and to the campaign contributors. If primaries precede a general election, they add another incentive for ambiguity, because in the primaries the candidates do not want to reveal too much information, to maintain some freedom of movement in the policy space for the general election. Ambiguity has an option value. 
JEL:  H1 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:14143&r=upt 
By:  Jing Li (Department of Economics, University of Pennsylvania) 
Abstract:  I study how choice behavior given unawareness of an event differs from choice behavior given subjective belief of zero probability on that event. Depending on different types of unawareness the decisionmaker suffers, behavior under unawareness is either incomparable with that under zero probability (in the case of pure unawareness), or drastically different (in the case of partial unawareness). The key differences are (1) partial unawareness permits dynamically inconsistent choice, while zero probability beliefs do not; and (2) there are unforeseen options in an unawareness environment that are necessarily modeled as dominated options in zero probability models. 
Keywords:  unawareness, zero probability, dynamic consistency, unforeseen contingency, unforeseen options 
JEL:  C70 C72 D80 D82 D83 
Date:  2008–01–02 
URL:  http://d.repec.org/n?u=RePEc:pen:papers:08022&r=upt 
By:  Wolfgang Härdle; Nikolaus Hautsch; Uta Pigorsch 
Abstract:  Measuring and modeling financial volatility is the key to derivative pricing, asset allocation and risk management. The recent availability of highfrequency data allows for refined methods in this field. In particular, more precise measures for the daily or lower frequency volatility can be obtained by summing over squared highfrequency returns. In turn, this socalled realized volatility can be used for more accurate model evaluation and description of the dynamic and distributional structure of volatility. Moreover, nonparametric measures of systematic risk are attainable, that can straightforwardly be used to model the commonly observed timevariation in the betas. The discussion of these new measures and methods is accompanied by an empirical illustration using highfrequency data of the IBM incorporation and of the DJIA index. 
Keywords:  Realized Volatility, Realized Betas, Volatility Modeling 
JEL:  C13 C14 C22 C52 C53 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008045&r=upt 