nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒01‒31
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The attitude toward probabilities of portfolio managers : an experimental study. By Nicolas Roux
  2. The no-trade interval of Dow and Werlang : some clarifications. By Alain Chateauneuf; Caroline Ventura
  3. Heterogeneous Impatience in a Continuous-Time Model By Chiaki Hara
  4. The Evolution of Time Preference with Aggregate Uncertainty By Arthur J. Robson; Larry Samuelson
  5. Alternating offers bargaining with loss aversion By Driesen Bram; Perea Andrés; Peters Hans
  6. The influence of decision-making rules on individual preference for ecological restoration: Evidence from an experimental survey By Nobuyuki Ito; Kenji Takeuchi; Koichi Kuriyama; Yasushi Shoji; Takahiro Tsuge; Yohei Mitani
  7. On the Coefficient of Variation as a Measure of Risk Sensitivity By James C. Cox; Vjollca Sadiraj
  8. Time and risk diversification in real estate investments: assessing the ex post economic value By Carolina Fugazza; Massimo Guidolin; Giovanna Nicodano
  9. Methodology for Determining the Acceptability of Given Designs in Uncertain Environments By Kleijnen, J.P.C.; Pierreval, H.; Zhang, J.
  10. Separating Curvature and Elevation: A Parametric Weighting Function By Mohammed Abdellaoui; Olivier l’Haridon; Horst Zank

  1. By: Nicolas Roux (Centre d'Economie de la Sorbonne)
    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.
    JEL: C91
    Date: 2008–09
  2. By: Alain Chateauneuf (Centre d'Economie de la Sorbonne); Caroline Ventura (Centre d'Economie de la Sorbonne)
    Abstract: The aim of this paper is two-fold : first, to emphasize that the seminal result of Dow and Werlang [9] remains valid under weaker conditions and this even if non-positive prices are considered, or equally that the no-trade interval result is robust when considering assets which can yield non-positive outcomes, second to make precise the weak uncertainty aversion behavior characteristic of the existence of such an interval.
    Keywords: Choquet expected utility, no-trade interval, perfect hedging, comonotone diversification, capacity.
    JEL: D81
    Date: 2008–07
  3. By: Chiaki Hara (Institute of Economic Research, Kyoto University)
    Abstract: In a continuous-time economy with complete markets, we study how the heterogeneity in the individual consumersf risk tolerance and impatience affects the representative consumerfs risk tolerance and impatience. We derive some formulas, which indicate that the representative consumerfs impatience decrease over time, and whether his risk tolerance increases or decreases over time depends on the sign of some weighted covariance between the individual consumersf cautiousness (derivative of risk tolerance with respect to own consumptions) and impatience. These results are then used to show that the short rate tends to decrease over time and the market price of risk is volatile in some special cases of heterogeneous economies.
    Keywords: Endogenous Growth; Representative consumer, risk tolerance, impatience, state-price deflator, shortrate process, market price of risk
    JEL: D51 D53 D61 D81 D91 G12 G13
    Date: 2009–01
  4. By: Arthur J. Robson; Larry Samuelson
    Date: 2009–01–15
  5. By: Driesen Bram; Perea Andrés; Peters Hans (METEOR)
    Abstract: The Rubinstein alternating offers bargaining game is reconsidered under the assumption that each player is loss averse and the associated reference point is equal to the highest turned down offer of the opponent in the past. This makes the payoffs and therefore potential equilibrium strategies dependent on the history of play. A subgame perfect equilibrium is constructed, in which the strategies depend on the history of play throughthe current reference points. It is shown that this equilibrium is unique under some assumptions that it shares with the equilibrium in the classical model: immediate acceptance of equilibrium offers, indifference between acceptance and rejection of such offers, and strategies depending only on the current reference points. It is also shown that in this equilibrium loss aversion is a disadvantage. Moreover, a relation with asymmetric Nashbargaining is established, where a player’s bargaining power is negatively related to own loss aversion and positively to the opponent’s loss aversion.
    Keywords: mathematical economics;
    Date: 2009
  6. By: Nobuyuki Ito (Graduate School of Economics, Kobe University); Kenji Takeuchi (Graduate School of Economics, Kobe University); Koichi Kuriyama (School of Political Science and Economics, Waseda University); Yasushi Shoji (Graduate School of Agriculture, Hokkaido University); Takahiro Tsuge (Faculty of Economics, Konan University); Yohei Mitani (School of Political Science and Economics, Waseda University)
    Abstract: We conduct an experimental survey to analyze how rules for collective decision-making influence individual preferences concerning nature restoration projects. Our study compares two decision-making rules - a consensus rule and a majority rule - wherein participants decide on a plan concerning nature restoration in the Kushiro Wetland, Japan. Our main finding is that the difference between the individual preferences and collective decision-making is less significant under the consensus rule than the majority rule. Furthermore, there is a larger disparity with regard to the marginal willingness to pay between collective and individual decisions when participants are unsatisfied with the results of collective choice.
    Date: 2008–10
  7. By: James C. Cox; Vjollca Sadiraj
    Abstract: Weber, Shafir, and Blais (2004) advocate use of the coefficient of variation (CV) as a measure of risk sensitivity and apply CV in a meta-analysis of data for risky choices by humans and animals. We critically re-examine the CV measure as either a normative or descriptive criterion for decision under risk. CV fails as a normative criterion because it violates first order stochastic dominance. Whether or not CV succeeds as a descriptive criterion depends on its consistency or inconsistency with data from experiments designed to test its distinctive properties. We report an experiment with human subjects motivated by salient monetary payoffs. The data are inconsistent with the hypothesis that the CVs of risky lotteries are a significant determinant of subjects' choices between the lotteries and certain payoffs.
    Date: 2009–01
  8. By: Carolina Fugazza; Massimo Guidolin; Giovanna Nicodano
    Abstract: Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in-sample experiments. This paper evaluates ex post, out-of-sample gains from diversification when E-REITs belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both Classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However, the out-of sample average Sharpe ratio and realized expected utility of long-horizon portfolios are frequently lower than that of a one-period portfolio, which casts doubts on the value of time diversification.
    Keywords: Real estate investment
    Date: 2009
  9. By: Kleijnen, J.P.C.; Pierreval, H.; Zhang, J. (Tilburg University, Center for Economic Research)
    Abstract: Managers wish to verify that a particular engineering design meets their require- ments. This design's future environment will differ from the environment assumed during the design. Therefore it is crucial to determine which variations in the envi- ronment may make this design unacceptable. The proposed methodology estimates which uncertain environmental parameters are important (so managers can become pro-active) and which parameter combinations (scenarios) make the design unac- ceptable. The methodology combines simulation, bootstrapping, and metamodeling. The methodology is illustrated through a simulated manufacturing system, includ- ing fourteen uncertain parameters of the input distributions for the various arrival and service times. These parameters are investigated through sixteen scenarios, selected through a two-level fractional-factorial design. The resulting simulation In- put/Output (I/O) data are analyzed through a first-order polynomial metamodel and bootstrapping. A second experiment gives some outputs that are indeed un- acceptable. Polynomials fitted to the I/O data estimate the border line (frontier) between acceptable and unacceptable environments.
    Keywords: Uncertainty modeling; Risk analysis; Robustness and sensitivity analysis; Simulation; Bootstrap
    JEL: C0 C1 C9
    Date: 2009
  10. By: Mohammed Abdellaoui; Olivier l’Haridon; Horst Zank
    Date: 2009

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