|
on Utility Models and Prospect Theory |
| By: | Nataliya Barasinska; Dorothea Schäfer; Andreas Stephan |
| Abstract: | This paper explores the relationship between risk attitude and asset diversification in household portfolios. We first examine the impact of manifested risk aversion on the total number of distinct assets held in a portfolio (naive diversification). The second part of the paper focuses on a more sophisticated strategy of diversification and asks whether financial theory is compatible with observed diversification patterns. Based on the German Socioeconomic Panel which provides unique measures of individual propensity for taking risk, the results of the regression analysis show that, along with some socioeconomic characteristics, the propensity for taking investment risk is an important predictor of a household's diversification strategy. However, some of our findings are strongly at odds with what the concept of mean-variance utility suggests. |
| Keywords: | household finances, diversification, financial portfolio |
| JEL: | D14 G11 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp807&r=upt |
| By: | Hakon Saelen; Giles Atkinson; Simon Dietz; Jennifer Helgeson; Cameron Hepburn |
| Abstract: | In the workhorse model of welfare economics, the elasticity of marginal utility, often denoted as @#019E, serves simultaneously to represent aversion to risk, aversion to spatial inequality, and preferences for intertemporal substitution. While Kreps-Porteus-Selden and Epstein-Zin preferences enable risk to be separated from intertemporal substitution, no model enables all tlhree concepts to be disentangled. This theoretical lacuna is important, particularly for the economics of climate change, which is a global, long-run, uncertain externality. Much debate, for instance in the wake of the Stern Review (Stern, 2007a) has focused on the appropriate value for @#019E. This paper tests the suitability of the workhorse model for climate change economics, by surveying the attitudes of over 3000 people to risk, time, and income inequality. The results show that individual attitudes to the three are only weakly correlated. This suggests that because the three concepts are captured by a single parameter, the model is underspecified and a richer model should be considered. |
| Keywords: | Climate Change, Discounting, Cost-Benefit Analysis, Risk Aversion, Intertemporal Substitution, Inequality Aversion, Intergenerational Equity |
| JEL: | D01 D63 C90 Q51 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:400&r=upt |
| By: | Sabrina Teyssier (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper reports on the results of an experiment testing whether the agents selfselect between a competitive payment scheme and a revenue-sharing scheme depending on their inequity aversion. Average efficiency should be increased when these payment schemes are endogenously chosen by agents. We show that the choice of the competition is negatively affected by disadvantageous inequity aversion and risk aversion. In the second half of the experiment, the effect of individual preferences is indirect through the effect of past results. The self-selection of agents increases the efficiency of the competitive scheme but not that of the revenue-sharing scheme, due to a heterogeneity of behaviors. |
| Keywords: | performance pay ; incentives ; self-selection ; inequity aversion ; competition ; revenue-sharing scheme |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00303727_v1&r=upt |
| By: | Anat Bracha; Donald Brown |
| Date: | 2008–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002291&r=upt |
| By: | Burks, Stephen V. (University of Minnesota, Morris); Carpenter, Jeffrey P. (Middlebury College); Goette, Lorenz (Federal Reserve Bank of Boston); Rustichini, Aldo (University of Minnesota) |
| Abstract: | Economic analysis has said little about how an individual’s cognitive skills (CS's) are related to the individual’s preferences in different choice domains, such as risk-taking or saving, and how preferences in different domains are related to each other. Using a sample of 1,000 trainee truckers we report three findings. First, we show a strong and significant relationship between an individual’s cognitive skills and preferences, and between the preferences in different choice domains. The latter relationship may be counterintuitive: a patient individual, more inclined to save, is also more willing to take calculated risks. A second finding is that measures of cognitive skill predict social awareness and choices in a sequential Prisoner's Dilemma game. Subjects with higher CS's more accurately forecast others' behavior, and differentiate their behavior depending on the first mover’s choice, returning higher amount for a higher transfer, and lower for a lower one. After controlling for investment motives, subjects with higher CS’s also cooperate more as first movers. A third finding concerns on-the-job choices. Our subjects incur a significant financial debt for their training that is forgiven only after twelve months of service. Yet over half leave within the first year, and cognitive skills are also strong predictors of who exits too early, stronger than any other social, economic and personality measure in our data. These results suggest that cognitive skills affect the economic lives of individuals, by systematically changing preferences and choices in a way that favors the economic success of individuals with higher cognitive skills. |
| Keywords: | field experiment, risk aversion, ambiguity aversion, loss aversion, time preference, Prisoners Dilemma, social dilemma, IQ, MPQ, numeracy, U.S. trucking industry, for-hire carriage, truckload (TL), driver turnover, employment duration, survival model |
| JEL: | C81 C93 L92 J63 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3609&r=upt |