nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2008‒08‒21
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Hedonic preferences, symmetric loss aversion and the willingness to pay-willingness to accept gap By Fosgerau, Mogens
  3. Risk Aversion and Physical Prowess: Prediction, Choice and Bias By Sheryl Ball; Catherine C. Eckel; Maria Heracleous
  4. Preferences for redistribution: a European comparative analysis By Elvire Guillaud
  5. Risk Analysis in Investment Appraisal By Savvides, Savvakis C.

  1. By: Fosgerau, Mogens
    Abstract: The results in this paper are relevant for the application of valuation studies in cost-benefit analysis in the presence of the willingness to pay - willingness to accept gap. We consider a consumer who makes choices based on choice preferences exhibiting reference-dependence and loss aversion. Choice preferences are related to underlying hedonic preferences through the marginal rates of substitution (MRS) at the reference. Our issue is the identification of hedonic preferences relevant to welfare economic analysis. We show that the hedonic MRS is identified from reference-dependent choices if loss aversion exhibits a certain symmetry. Moreover, we show that this symmetry is rational in the sense that it leads to maximal expected hedonic utility when choices are made under reference-dependent choice preferences.
    Keywords: Behavioral public economics; valuation of non-market goods; prospect theory; loss aversion
    JEL: D01
    Date: 2008
  2. By: SHerrill Shaffer
    Abstract: This paper demonstrates that exaggerated risk aversion may comprise a rational form of strategic behavior in the face of asymmetric information. Unlike some other forms of strategic behavior analyzed previously, this behavior confers a benefit in the form of higher ex post consumption (not merely higher expected consumption or expected utility) and whether or not markets are perfectly competitive. Such behavior might help explain historically large equity premia.
    Date: 2008–08
  3. By: Sheryl Ball; Catherine C. Eckel; Maria Heracleous
    Abstract: This paper reports on experiments where individuals are asked to make risky decisions for themselves as well as predicting the risky decisions of others. Prior research has generally shown that people expect women to be more risk averse than men and that they, in fact are - a result we also find. We ask whether this is a pure gender effect or whether there is more to this result. In particular, both evolutionary and economic theories suggest that physically stronger decision makers should make riskier decisions, suggesting physical prowess as an underlying cause of gender differences. These experiments explore whether risk aversion is associated with a number of measures of real and perceived physical prowess. We find that forecasters consistently predict the types of risky decision produced by both gender and physical prowess, but often at magnitudes that significantly exaggerate than actual differences. Sources of bias are also examined, showing that specific characteristics of the target and predictor lead to over-estimation or under-estimation of risk preferences.
    Keywords: Risk Aversion, Physical Risk, Experiment, Gender, Stereotyping
    Date: 2008
  4. By: Elvire Guillaud
    Abstract: What explains people's preferences for state intervention in social policies? Conducting a cross-section analysis on individual-level survey data, we highlight the link between the economic position of agents and their specific demand toward redistribution. Controlling for a number of factors usually found to impact individual preferences in the literature, we take the egoistic motives for redistribution seriously and focus on the role played by the occupational status of individuals in shaping their preferences. Thus, (i) we estimate the relative importance of economic factors in terms of current and expected gain, allowing for social mobility experience and risk aversion. Further, (ii) we try to identify which socio-political groups could be formed on the basis of their preferences for redistribution. Finally, (iii) we highlight differences between European countries as it comes to the grouping of agents.
    Date: 2008
  5. By: Savvides, Savvakis C.
    Abstract: The methodology and uses of Monte-Carlo simulation technique are presented as applied to the analysis and assessment of risk in the evaluation of investment projects. The importance of risk analysis in investment appraisal is highlighted and the stages in the process introduced. The results generated by a risk analysis application are interpreted, including the investment decision criteria and measures of risk based on the expected value concept. Conclusions are drawn regarding the usefulness and limitations of risk analysis in investment appraisal.
    Keywords: risk analysis; investment appraisal; Monte Carlo simulation; project evaluation; measures of risk; investment decision criteria
    JEL: G31 G32 M21
    Date: 1994–03

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