nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2008‒09‒13
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Uncertainty Averse Preferences By Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Luigi Montrucchio
  2. Is the veil of ignorance only a concept about risk? An experiment By Hannah Hörisch
  3. Rationality and the Nature of the Market By Marco Castillo; Ragan Petrie; Maximo Torero
  4. Risk Aversion, Time Preference, and the Social Cost of Carbon By David Anthoff; Richard S. J. Tol; Gary W. Yohe
  5. The Influence of Affect on Beliefs, Preferences and Financial Decisions By Kuhnen, Camelia; Knutson, Brian
  6. The Framing of Games and the Psychology of Play By Heike Hennig-Schmidt
  7. Heterogeneous bids in auctions with rational and markdown bidders - Theory and Experiment By Oliver Kirchkamp; J. Philipp Reiß
  8. Conformity, reciprocity and the sense of justice. How social contract-based preferences and beliefs explain norm compliance: the experimental evidence By Lorenzo Sacconi; Marco Faillo
  9. The Maximal Domain for the Revelation Principle when Preferences are Menu Dependent By Saran Rene
  10. Attitude-Dependent Altruism, Turnout and Voting By Julio J. Rotemberg
  11. Emotion and reason in everyday risk perception By Robin Hogarth; Mariona Portell; Anna Cuxart; Gueorgui I. Kolev

  1. By: Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Luigi Montrucchio
    Abstract: We study uncertainty averse preferences, that is, complete and transitive preferences that are convex and monotone. We establish a representation result, which is at same time general and rich in structure. Many objective functions commonly used in applications are special cases of this representation.
    Keywords: ambiguity aversion, games against nature, model uncertainty, smooth ambiguity preferences, variational preferences
    JEL: D81
    Date: 2008
  2. By: Hannah Hörisch (University of Munich, Seminar for Economic Theory, Ludwigstraße 28 (Rgb.), 80539 Munich, Germany, email:
    Abstract: We implement the Rawlsian veil of ignorance in the laboratory. Our experimental design allows separating the effects of risk and social preferences behind the veil of ignorance. Subjects prefer more equal distributions behind than in front of the veil of ignorance, but only a minority acts according to maximin preferences. Men prefer more equal allocations mostly for insurance purposes, women also due to social preferences for equality. Our results contrast the Utilitarian's claim that behind the veil of ignorance maximin preferences necessarily imply infinite risk aversion. They are compatible with any degree of risk aversion as long as social preferences for equality are sufficiently strong.
    Keywords: deterrence, law and economics, incentives, crowding out, experiment
    JEL: D64 C99 D63
    Date: 2008–02
  3. By: Marco Castillo; Ragan Petrie; Maximo Torero
    Abstract: We investigate the distribution of risk preferences and the frequency of expected utility violations along the gradient of market development. To do this, we collect experimental and survey data from a random sample of the population at four sites in Peru that differ in their level of competition and development. Similar to previous studies, we find that violations of expected utility theory are frequent. More importantly, however, violations are far less frequent the more competitive the market is. Also, our study suggests that experience in trade is not always associated with fewer behavioral anomalies. For instance, wholesale traders in an oligopolistic market with many years of experience are more likely to violate expected utility theory than entrepreneurs in an adjacent market with less experience. As hypothesized by Alchian (1950), it is in highly competitive markets where the evidence of rational behavior is found.
    JEL: C91 C93 D81
    Date: 2008–09
  4. By: David Anthoff (Economic and Social Research Institute (ESRI)); Richard S. J. Tol (Economic and Social Research Institute (ESRI)); Gary W. Yohe (Wesleyan University)
    Abstract: The Stern Review reported a social cost of carbon of over $300/tC, calling for ambitious climate policy. We here conduct a systematic sensitivity analysis of this result on two crucial parameters: the rate of pure time preference, and the rate of risk aversion. We show that the social cost of carbon lies anywhere in between 0 and $120,000/tC. However, if we restrict these two parameters to match observed behavior, an expected social cost of carbon of $60/tC results. If we correct this estimate for income differences across the world, the social cost of carbon rises to over $200/tC.
    Date: 2008–09
  5. By: Kuhnen, Camelia; Knutson, Brian
    Abstract: Recent research in neuroeconomics suggests that the same brain areas that generate emotional states are also involved in the processing of information about risk, rewards and punishments. These findings imply that emotions may influence financial decisions in a predictable and parsimonious way. Our evidence suggests that affect -- generated either by exogenous manipulations, or endogenously by outcomes of prior actions -- indeed matters for financial risk taking, and that it does so by changing preferences as well as the belief formation process. Positive and arousing emotional states such as excitement induce people to take more risk, and to be more confident in their ability to evaluate the available investment options, relative to neutral states, while negative emotions such as anxiety have the opposite effects. Moreover, beliefs are updated in a way that is consistent with the self-preservation motive of maintaining positive affect and avoiding negative affect, by not fully taking into account new information that is at odds with the individuals' prior choices. Therefore, characteristics of markets, economic policies or organization design that have an impact on emotional brain circuits may influence decision making and affect important outcomes at the individual and aggregate level.
    Keywords: affect; emotions; beliefs; risk taking; learning; limbic system; neuroeconomics; neurofinance
    JEL: D81 G11 C91 D87
    Date: 2008–09–10
  6. By: Heike Hennig-Schmidt
    Abstract: Psychological game theory can help provide a rational choice explanation of framing effects; frames influence beliefs, beliefs influence motivations. We explain this theoretically, and explore the empirical relevance experimentally. In a 2×2 design of one-shot public good games we show that frames affect subject’s first- and second-order beliefs, and contributions. From a psychological game-theoretic framework we derive two mutually compatible hypotheses about guilt aversion and reciprocity under which contributions are related to second- and first-order beliefs, respectively. Our results are consistent with either.
    Keywords: Framing, psychological games, guilt aversion, reciprocity, public good games, voluntary cooperation
    JEL: C91 C72 D64 Z13
    Date: 2008–07
  7. By: Oliver Kirchkamp (Universität Jena, School of Economics); J. Philipp Reiß (Maastricht University, Economics Department)
    Abstract: We present results from a series of experiments that allow us to measure overbidding and, in particular, underbidding in first-price auctions. We investigate how the amount of underbidding depends on seemingly innocent parameters of the experimental setup. To structure our data we present and test a theory of constant markdown bids. While a fraction of bidders can be well described by Bayesian Nash equilibrium bids, a larger fraction seems to either use constant markdown bids or seems to rationally optimise against a population where some members use markdown bids and some are rational.
    Keywords: Auction, Experiment, Overbidding, Underbidding, Risk-Aversion
    JEL: C92 D44
    Date: 2008–09–01
  8. By: Lorenzo Sacconi; Marco Faillo
    Abstract: Compliance with a social norm is a matter of self-enforceability and endogenous motivation to conform, which is relevant not just to social norm,s but also to a wide array of institutions. Here we consider endogenous mechanisms that become effective once the game description has been enriched with pre-play communication allowing impartial agreements on a norm (even if they remain not binding in any sense). Behavioral models understand conformity as the maximization of some “enlarged” utility function properly defined to make room for the individual’s “desire” to comply with a norm reciprocally adhered to by other participants – whose conformity in turn depends on the expectation that the norm will be in fact reciprocally adhered to. In particular this paper presents an experimental study on the “conformity-with-the-ideal preference theory” (Grimalda and Sacconi 2005), based of a simple experimental three person game called the “exclusion game”. If the players participate in a “constitutional stage” (under a veil of ignorance ) in which they decide the rule of division unanimously, the experimental data show a dramatic change in the participants’ behavior pattern. Most of them conform to the fair rule of division to which they have agreed in a pre-play communication stage, whereas in the absence of this agreement they behave egoistically. The paper also argues that this behavior is largely consistent with what John Rawls (1971) called the “sense of justice”, a theory of norm compliance unfortunately overlooked by economists and which should be reconsidered after the behaviorist turn in economics.
    Keywords: conformist preferences, reciprocity, veil of ignorance, psychological games, fairness, experiments
    JEL: C7 C9 D63 D64
    Date: 2008
  9. By: Saran Rene (METEOR)
    Abstract: We extend the domain of preferences to include menu-dependent preferences and characterize the maximal subset of this domain in which the revelation principle holds. Minimax-regret preference is shown to be outside this subset.
    Keywords: microeconomics ;
    Date: 2008
  10. By: Julio J. Rotemberg
    Abstract: This paper presents a goal-oriented model of political participation based on two psychological assumptions. The first is that people are more altruistic towards individuals that agree with them and the second is that people's well-being rises when other people share their personal opinions. The act of voting is then a source of vicarious utility because it raises the well-being of individuals that agree with the voter. Substantial equilibrium turnout emerges with nontrivial voting costs and modest altruism. The model can explain higher turnout in close elections as well as votes for third-party candidates with no prospect of victory. For certain parameters, these third party candidates lose votes to more popular candidates, a phenomenon often called strategic voting. For other parameters, the model predicts "vote-stealing" where the addition of a third candidate robs a viable major candidate of electoral support.
    JEL: D64 D72
    Date: 2008–09
  11. By: Robin Hogarth; Mariona Portell; Anna Cuxart; Gueorgui I. Kolev
    Abstract: The importance of emotion in risk perception has been well documented in field and experimental studies. However, little is known about its role in everyday life. On thirty occasions over ten consecutive working days, ninety-four participants were prompted at random – via mobile telephones – to report on their emotions and to assess perceived risks. Subsequently, risks associated with six occasions were re-assessed. Emotion was found to explain significant variance in risk perception over and above “reason” (assessed severity and possibility of risks) and to contribute to the tendency to assess risk lower in retrospect than when experienced. Our investigation illuminates the pervasive role of emotion in everyday risk perception and the value and feasibility of collecting meaningful samples of naturally occurring behavior with simple technology.
    Keywords: Experience sampling method, multilevel analysis, risk perception, self-assessment manikinds (SAM)
    JEL: C39 C93 M10
    Date: 2008–09

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