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on Utility Models and Prospect Theory |
| By: | Mattos, Fabio; Garcia, Philip; Pennings, Joost M.E. |
| Abstract: | This paper investigates the dynamics of sequential decision-making in agricultural futures and options markets. Analysis of trading records of 12 traders identified considerable heterogeneity in individual dynamic trading behavior. Using risk measures derived from the deltas and vegas of trader€ٳ portfolios, we find nearly half the traders behavior is consistent with a house-money effect and the other half with loss aversion. These findings correspond closely to expected behavior inferred from elicited utility and probability weighting functions. The results call into question more aggregate findings that discount probability weighting to develop risk measures which support the notion of more uniform, less heterogeneous, behavior. Understanding behavior in a prospect theory context appears to call for investigation of both the probability weighting and utility functions. Our findings also suggest that strategies for loss-averse traders who consolidate gains and avoid using gains in risk-seeking market activities are effective. |
| Keywords: | loss aversion, house-money effect, futures, options, Agricultural Finance, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ags:nccest:37605&r=upt |
| By: | Nicolas Roux (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This paper proposes an experiment about the attitude toward probabilities on a population of portfolio managers. Its aim is to check whether or not portfolio managers are neutral toward probabilities. Meanwhile, it presents a experimental protocole that highlights an inconsistency between two experimental techniques. It also introduces a new functional form for the probability weighting function. Results unambiguously show that portfolio managers are not neutral toward probabilities and that they display a strong heterogeneity in their preferences. |
| Keywords: | Attitude toward probabilities, probability weighting function, expected utility, rank dependent expected utility, experimental economics, decision under risk. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00344785_v1&r=upt |
| By: | Kohlscheen, Emanuel (Department of Economics, University of Warwick,); O’Connell, Stephen (Department of Economics, Swarthmore College,) |
| Abstract: | We derive closed-form solutions for the Rubinstein alternating offers game for cases where the two players have (possibly asymmetric) utility functions that belong to the HARA class and discount the future at a constant rate. We show that risk aversion may increase a bargainers payoff. This result - which contradicts Roth’s 1985 theorem tying greater risk neutrality to a smaller payoff - does not rely on imperfect information or departures from expected utility maximization. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:878&r=upt |
| By: | Carmen Lee (Marketing Department, VU University Amsterdam); Roman Kraeussl (Finance Dept., VU University Amsterdam); André Lucas (Finance Dept., VU University Amsterdam); Leonard J. Paas (Marketing Dept., VU University Amsterdam) |
| Abstract: | The disposition effect postulates that individuals hold losing investments too long. However, many investors eventually sell at a loss. This paper integrates prospect theory, reference point adaptation and cognitive-experiential self-theory to provide more insight on such investor’s capitulation. We empirically study the contribution of each component as well as their inter-relationships in two dynamic experiments. Consistent with utility maximization, we find a major effect of positive expectations. Second, a larger total loss size and a longer time in a losing position are related to a downward shift in the reference point. The dynamically adapting reference point indirectly increases the probability to capitulate. Also, a recent loss leads to more negative emotions, which also indirectly increases the probability to capitulate. |
| Keywords: | investments; adaptation; reference point; capitulation; selling decisions; disposition effect; financial markets |
| JEL: | C91 D81 |
| Date: | 2008–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080112&r=upt |
| By: | Xiaojing Kong |
| Abstract: | We report an experiment designed to evaluate the impact of loss aversion on rent-seeking contests. We find, as theoretically predicted, a negative relationship between rent-seeking expenditures and loss aversion. However, for any degree of loss aversion, levels of rent-seeking expenditure are higher than predicted. Moreover, we find that the effect of loss aversion becomes weaker with repetition of the contest. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2008-13&r=upt |
| By: | Frank M. Fossen |
| Abstract: | The empirical finding that entrepreneurs tend to invest a large share of their wealth in their own firms despite comparably low returns and high risk has become known as the private equity premium puzzle. This paper provides evidence supporting the hypothesis that lower risk aversion of entrepreneurs, and not necessarily credit constraints, may explain this puzzle. The analysis is based on a large, representative panel data set for Germany, which provides information on asset portfolios and experimentally validated risk attitudes. The results show that both the ownership probability and the conditional portfolio share of private business equity significantly increase with higher risk tolerance. |
| Keywords: | Entrepreneurship, Private Equity, Investment, Risk Aversion |
| JEL: | G11 G32 L26 J23 D81 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp839&r=upt |
| By: | Bommier, Antoine; Villeneuve, Bertrand |
| Abstract: | The standard literature on the value of life relies on Yaari’s (1965) model, which includes an implicit assumption of risk neutrality with respect to life duration. To overpass this limitation, we extend the theory to a simple variety of nonadditively separable preferences. The enlargement we propose is relevant for the evaluation of life-saving programs: current practice, we estimate, puts too little weight on mortality risk reduction of the young. Our correction exceeds in magnitude that introduced by the switch from the notion of number of lives saved to the notion of years of life saved. |
| Keywords: | Value of Statistical Life; Lifecycle Behavior; Cost-benefit Analysis |
| JEL: | D81 I18 J17 D91 D61 |
| Date: | 2008–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11943&r=upt |
| By: | Eric Langlais |
| Abstract: | There is evidence that asymmetric information does exist between litigants: not in a way supporting Bebchuk (1984)’s assumption that defendants’ degree of fault is private information, but more likely as a result of parties’ predictive capacity about the outcome at trial (Osborne, 1999). In this paper, we investigate the incidence of one component of this asymmetric predictive power, which has been examplified in experimental economics. We assume that litigants assess their priors on the plaintiff’s prevailing rate at trial in a way consistent with the self-serving bias, which is the source of the asymmetric information. We compare the predictions of this model regarding the influence of individual priors with those in the literature. Finally, we analyse the influence of another reason for probability distorsion, i.e. risk aversion in the sense of Yaari (1987). |
| Keywords: | litigation, pretrial bargaining, self-serving bias, risk aversion |
| JEL: | D81 K42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-30&r=upt |
| By: | Joep Sonnemans (CREED, Amsterdam School of Economics, University of Amsterdam); Frans van Dijk (Council for the Judiciary, The Hague, the Netherlands) |
| Abstract: | In criminal cases the task of the judge is to transform the uncertainty about the facts into the certainty of the verdict. In this experiment we examine the relationship between evidence of which the strength is known, subjective probability of guilt and verdict for abstract cases. We look at two situations: (1) all evidence is given and (2) evidence can be acquired. Roughly half of the participants do not base their decision on a subjective belief of the probability of guilt. The others underestimate in general the probability of guilt, but this is more than compensated by a tendency to convict at too low probability of guilt. In the situation where evidence can be acquired, participants do not acquire enough evidence. |
| Keywords: | Decision under uncertainty; judicial decisions; experiment |
| JEL: | C91 D81 K4 |
| Date: | 2008–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080089&r=upt |
| By: | Dash, Rajdeep K (School of Electronics and Computer Science,University of Southampton); Giovannucci, Andrea (Artificial Intelligence Research Institute, Spanish Council for Scientific Research); Jennings, Nicholas R. (School of Electronics and Computer Science,University of Southampton,); Mezzetti, Claudio (Department of Economics, University of Warwick); Ramchurn, Sarvapali D. (School of Electronics and Computer Science,University of Southampton); Rodriguez-Aguilar, Juan A. (Artificial Intelligence Research Institute, Spanish Council for Scientific Research) |
| Abstract: | Vickrey-Clarke-Groves (VCG) mechanisms are often used to allocate tasks to selfish and rational agents. VCG mechanisms are incentive-compatible, direct mechanisms that are efficient (i.e. maximise social utility) and individually rational (i.e. agents prefer to join rather than opt out). However, an important assumption of these mechanisms is that the agents will always successfully complete their allocated tasks. Clearly, this assumption is unrealistic in many real-world applications where agents can, and often do, fail in their endeavours. Moreover, whether an agent is deemed to have failed may be perceived differently by different agents. Such subjective perceptions about an agent’s probability of succeeding at a given task are often captured and reasoned about using the notion of trust. Given this background, in this paper, we investigate the design of novel mechanisms that take into account the trust between agents when allocating tasks. Specifically, we develop a new class of mechanisms, called trust-based mechanisms, that can take into account multiple subjective measures of the probability of an agent succeeding at a given task and produce allocations that maximise social utility, whilst ensuring that no agent obtains a negative utility. We then show that such mechanisms pose a challenging new combinatorial optimisation problem (that is NP-complete), devise a novel representation for solving the problem, and develop an effective integer programming solution (that can solve instances with about 2×105 possible allocations in 40 seconds). |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:880&r=upt |
| By: | Vergara, Oscar; Zuba, Gerhard; Seaquist, Jack |
| Abstract: | Powerpoint slide show presenting information about AIR (the first catastrophic modeling company), weather-based yield models, agricultural portfolio loss model, and applications to crop insurance/reinsurance. |
| Keywords: | risk, crop insurance, reinsurance, modeling, agricultural loss, loss model, yield model, Risk and Uncertainty, |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ags:sccegs:43766&r=upt |
| By: | Dietrich Franz; List Christian (METEOR) |
| Abstract: | How can the propositional attitudes of several individuals be aggregated into overall collective propositional attitudes? Although there are large bodies of work on the aggregation of various special kinds of propositional attitudes, such as preferences, judgments, probabilities and utilities, the aggregation of propositional attitudes is seldom studied in full generality. In this paper, we seek to contribute to filling this gap in the literature. We sketch the ingredients of a general theory of propositional attitude aggregation and prove two new theorems. Our first theorem simultaneously characterizes some prominent aggregation rules in the cases of probability, judgment and preference aggregation, including linear opinion pooling and Arrovian dictatorships. Our second theorem abstracts even further from the specific kinds of attitudes in question and describes the properties of a large class of aggregation rules applicable to a variety of belief-like attitudes. Our approach integrates some previously disconnected areas of investigation. |
| Keywords: | mathematical economics; |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2008047&r=upt |