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on Utility Models and Prospect Theory |
| By: | Gray, Wesley |
| Abstract: | Evidence suggests that arbitragers exchange investment ideas. We analyze why and under what circumstances sharing occurs. Our model suggests that sharing ideas will lead to the following: more efficient asset prices, larger arbitrager profits, and correlated arbitrager returns. We predict that arbitragers will exchange ideas in markets where arbitragers are capital constrained, noise trader influence is high, and arbitrage investors are more loss averse. We also predict that arbitrage networks can lead to crowded trades, which can create systematic risk in extreme market circumstances. |
| Keywords: | Arbitrage; hedge funds; market efficiency; information exchange; loss aversion; crowded trades |
| JEL: | G14 G12 G11 G23 G10 |
| Date: | 2008–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12621&r=upt |
| By: | Eichberger, Jürgen (Sonderforschungsbereich 504); Guerdjikova, Ani (Cornell University) |
| Abstract: | In this paper, we consider a decision-maker who tries to learn the distribution of outcomes from previously observed cases. For each observed sequence of cases the decision-maker predicts a set of priors expressing his beliefs about the underlying probability distribution. We impose a version of the concatenation axiom introduced in BILLOT, GILBOA, SAMET AND SCHMEIDLER (2005) which insures that the sets of priors can be represented as a weighted sum of the observed frequencies of cases. The weights are the uniquely determined similarities between the observed cases and the case under investigation. |
| Date: | 2008–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:sfbmaa:08-07&r=upt |
| By: | Etienne Farvaque (Equippe - Universités de Lille, and DULBEA - Université Libre de Bruxelles.); Alexander Mihailov (School of Economics, University of Reading) |
| Abstract: | We study the evolution of inflation aversion preferences across generations. In the theoretical part of the paper, we analyze the dynamics of such preferences in an overlapping-generations model with heterogenous mature agents characterized by different degrees of inflation aversion. We show how the stability of a society’s degree of inflation aversion depends on the strength and speed of changes in the structure of the population. The empirical part then proposes two applications in support of the theoretical results. We first link demographic structures to inflation aversion, and then proceed by looking at the relations between income (in)equality and measures of inflation aversion. |
| Keywords: | Intergenerational transmission, evolving preferences, inflation aversion, central bank independence, demographic change, income inequality |
| JEL: | E24 E31 E58 J10 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2008-71&r=upt |
| By: | Ehrhart, Karl-Martin (Universitaet Karlsruhe); Ott, Marion (Universitaet Karlsruhe); Abele, Susanne (Miami University, Department of Psychology) |
| Abstract: | It is not a secret that certain auction formats yield on average higher prices than others. The phenomenon that dynamic auctions are more likely to elicit higher bids than static one-shot auctions is often associated with the term ''auction fever.'' On a psychological level, we consider the so-called pseudo-endowment effect as largely responsible for peoples’ tendency to submit higher bids, potentially amplified by the source-dependence effect. The phenomenon of auction fever is replicated in an experimental investigation of different auction formats within a private values framework where bidders have private but incomplete knowledge of their valuation for a hypothetical good. We suggest this assumption to be more realistic than definite private values, as assumed in the traditional IPV model. An additional experimental investigation within the traditional IPV framework does not either reveal any indication for the appearance of auction fever. On the basis of our experimental observations we present a model of reference-dependent utility theory that comprehends the phenomenon by assuming that bidders' reference points are shifted by the pseudo-endowment and the source-dependence effect. |
| Date: | 2008–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:sfbmaa:08-27&r=upt |
| By: | Simone Cerreia-Vioglio; Fabio Maccheroni; Massimo Marinacci; Luigi Montrucchio |
| Abstract: | When there is uncertainty about interest rates (typically due to either illiquidity or defaultability of zero coupon bonds) the cash- additivity assumption on risk measures becomes problematic. When this assumption is weakened, to cash-subadditivity for example, the equivalence between convexity and the diversication principle no longer holds. In fact, this principle only implies (and it is implied by) quasiconvexity. For this reason, in this paper quasiconvex risk measures are studied. We provide a dual characterization of quasiconvex cash-subadditive risk measures and we establish necessary and sufficient conditions for their law invariance. As a byproduct, we obtain an alternative characterization of the actuarial mean value premium principle. |
| Keywords: | Risk Measures, Diversification, Cash-subadditivity, Quasiconvexity, Law-invariance, Mean Value Premium Principle |
| JEL: | D81 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:81&r=upt |
| By: | Regenwetter, Michel (University of Illinois at Urbana-Champaign) |
| Abstract: | For centuries, the mathematical aggregation of preferences by groups, organizations or society has received keen interdisciplinary attention. Extensive 20th century theoretical work in Economics and Political Science highlighted that competing notions of “rational social choice” intrinsically contradict each other. This led some researchers to consider coherent “democratic decision making” a mathematical impossibility. Recent empirical work in Psychology qualifies that view. This nontechnical review sketches a quantitative research paradigm for the behavioral investigation of mathematical social choice rules on real ballot, experimental choice, or attitudinal survey data. The paper poses a series of open questions. Some classical work sometimes makes assumptions about voter preferences that are descriptively invalid. Do such technical assumptions lead the theory astray? How can empirical work inform the formulation of meaningful theoretical primitives? Classical “impossibility results” leverage the fact that certain desirable mathematical properties logically cannot hold universally in all conceivable electorates. Do these properties nonetheless hold in empirical distributions of preferences? Will future behavioral analyses continue to contradict the expectations of established theory? Under what conditions and why do competing consensus methods yield identical outcomes? |
| Date: | 2008–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:sfbmaa:08-26&r=upt |
| By: | Robert J. Aumann |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp497&r=upt |
| By: | Ondřej Rydval (Max Planck Institute of Economics, Jena, Germany, and CERGE-EI, Prague, Czech Republic); Andreas Ortmann (CERGE-EI (a joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic), Prague, Czech Republic); Sasha Prokosheva (CERGE-EI (a joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic), Prague, Czech Republic); Ralph Hertwig (University of Basel, Switzerland) |
| Abstract: | We replicate three pricing tasks of Gneezy, List and Wu (2006) for which they document the so called uncertainty effect, namely that people value a binary lottery over non-monetary outcomes less than other people value the lottery’s worse outcome. Unlike the authors who implement a verbal lottery description, we use a physical lottery format which rules out any misinterpretation of the lottery structure. Contrary to Gneezy, List and Wu, we systematically observe that subjects’ willingness to pay for the lottery is significantly higher than other subjects' willingness to pay for the lottery’s worse outcome. |
| Keywords: | Risky choice, framing, experiments, task ambiguity |
| JEL: | C81 C91 C93 D83 |
| Date: | 2009–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-002&r=upt |
| By: | Olivier Bochet; Ton Storcken |
| Abstract: | Domains of individual preferences for which the well-known impossibility Theorems of Gibbard-Satterthwaite and Muller-Satterthwaite do not hold are studied. First, we introduce necessary and sufficient conditions for a domain to admit non-dictatorial, Pareto efficient and either strategy-proof or Maskin monotonic social choice rules. Next, to comprehend the limitations the two Theorems imply for social choice rules, we search for the largest domains that are possible. Put differently, we look for the minimal restrictions that have to be imposed on the unrestricted domain to recover possibility results. It turns out that, for such domains, the conditions of inseparable pair and of inseparable set yield the only maximal domains on which there exist non-dictatorial, Pareto efficient and strategy-proof social choice rules. Next, we characterize the maximal domains which allow for Maskin monotonic, non-dictatorial and Pareto-optimal social choice rules. |
| Keywords: | Strategy-proofness; Maskin monotonicity; Restricted domains; Maximal domains |
| JEL: | C72 D63 D61 C78 D71 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0901&r=upt |
| By: | Berliant, Marcus; Yu, Chia-Ming |
| Abstract: | Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies. An open subset of economies where none of the rational expectations equilibria fully reveal private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer’s utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on their location of residence. Existence of a rational expectations equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. |
| Keywords: | Urban Economics; General Equilibrium; Private Information; Rational Expectations |
| JEL: | R13 D82 D51 |
| Date: | 2009–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12709&r=upt |