|
on Utility Models and Prospect Theory |
| By: | Borghans, Lex (Maastricht University); Golsteyn, Bart (Maastricht University); Heckman, James J. (University of Chicago); Meijers, Huub (Maastricht University) |
| Abstract: | This paper demonstrates gender differences in risk aversion and ambiguity aversion. It also contributes to a growing literature relating economic preference parameters to psychological measures by asking whether variations in preference parameters among persons, and in particular across genders, can be accounted for by differences in personality traits and traits of cognition. Women are more risk averse than men. Over an initial range, women require no further compensation for the introduction of ambiguity but men do. At greater levels of ambiguity, women have the same marginal distaste for increased ambiguity as men. Psychological variables account for some of the interpersonal variation in risk aversion. They explain none of the differences in ambiguity. |
| Keywords: | gender, risk aversion, ambiguity aversion |
| JEL: | J24 D80 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3985&r=upt |
| By: | Anthoff, David (ESRI); Tol, Richard S. J. (ESRI); Yohe, Gary W.(Wesleyan University, CT, USA) (ESRI) |
| Abstract: | It is well-known that the discount rate is crucially important for estimating the social cost of carbon, a standard indicator for the seriousness of climate change and desirable level of climate policy. The Ramsey equation for the discount rate has three components: the pure rate of time preference, a measure of relative risk aversion, and the rate of growth of per capita consumption. Much of the attention on the appropriate discount rate for long-term environmental problems has focussed on the role played by the pure rate of time preference in this formulation. We show that the other two elements are numerically just as important in considerations of anthropogenic climate change. The elasticity of the marginal utility with respect to consumption is particularly important because it assumes three roles: consumption smoothing over time, risk aversion, and inequity aversion. Given the large uncertainties about climate change and widely asymmetric impacts, the assumed rates of risk and inequity aversion can be expected to play significant roles. The consumption growth rate plays four roles. It is one of the determinants of the discount rate, and one of the drivers of emissions and hence climate change. We find that the impacts of climate change grow slower than income, so that the effective discount rate is higher than the real discount rate. The differential growth rate between rich and poor countries determines the time evolution of the size of the equity weights. As there are a number of crucial but uncertain parameters, it is no surprise that one can obtain almost any estimate of the social cost of carbon. We even show that, for a low pure rate of time preference, the estimate of the social cost of carbon is indeed arbitrary ? as one can exclude neither large positive nor large negative impacts in the very long run. However, if we probabilistically constrain the parameters to values that are implied by observed behaviour, we find that the social cost of carbon, corrected for uncertainty and inequity, is 61 US dollar per metric tonne of carbon. |
| Keywords: | Climate change/income elasticity/inequity aversion/pure time preference/risk aversion/Social cost of carbon/time horizon/uncertainty/policy/growth |
| JEL: | Q54 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp276&r=upt |
| By: | Brice Magdalou; Dimitri Dubois; Phu Nguyen-Van |
| Abstract: | We experimentally investigate cooperative behavior in a social dilemma situation, where the socially efficient outcome may be encouraged by risk aversion and/or inequality aversion. The first part of our experiment is devoted to the elicitation of subjects' aversion profile, taking care to not confuse the two dimensions. Subjects are then grouped by three according to their aversion profiles, and interact in a repeated social dilemma game. In this game, agents are characterised by a social status so that higher the agent's status, higher will be her earnings. Cooperation is costly for a majority of agents at each period, but statuses can be reversed in future periods. We show that cooperation is strongly in°uenced by the group's aversion profile. Groups averse in both dimensions cooperate more than groups averse in only one dimension. Moreover cooperation seems to be more affected by risk aversion, whereas one might interpret cooperative behavior as an inequality averse or altruistic attitude. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:09-02&r=upt |
| By: | Emilio Cerdá; Sonia Quiroga Gómez |
| Abstract: | Extreme meteorological events have increased over the last decades and it is widely accepted that it is due to climate change (IPCC, 2007; Beniston et al., 2007). Some of these extremes, like drought or frost episodes largely affect agricultural outputs and risk management becomes crucial. The goal of this paper it is to analyze farmers’ decisions about risk management, taking into account climatological and meteorological information. We consider a situation in which the farmer, as part of crop management, has available a technology to protect the harvest from weather effects. This approach has been used by Murphy et al. (1985), Katz and Murphy (1990 and 1997) and others in the case that the farmer maximizes the expected returns. In our model we introduce the attitude towards risk. Thus we can evaluate how the optimal decision is affected by the absolute risk aversion coefficient of Arrow-Pratt, and compute the economic value of the information in this context, while proposing a measure to estimate the amount of money that the farmer is willing to pay for this information in terms of the certainty equivalent. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2009-04&r=upt |
| By: | Pierpaolo Benigno; Salvatore Nisticò |
| Abstract: | In a rational-expectation model of international portfolio and consumption decisions, international home bias in equities depends on the correlation between non-diversifiable labor income risk and the cross-country equity returns, when agents have log utility in consumption. We show that there is weak empirical evidence for this channel. Moreover standard preferences fail to account for other empirical evidence on international asset prices. We propose an alternative environment with model uncertainty populated by the sophisticated agents of the robust-control theory of Hansen and Sargent (2005). Maintaining the assumption of unitary intertemporal elasticity of substitution, we show that home bias in equity can also depend on the correlation between equity returns and the real exchange rate and its weight depends on a measure of the distrust that the agent has with respect to the objective probability distribution. This hedging component, which mainly refers to long-run risk in real exchange rate, is more relevant from an empirical point of view. The proposed model is successful along other dimensions, where instead the standard rational-expectation model fails. |
| JEL: | F3 G11 G15 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14734&r=upt |
| By: | Andrei V. Bazhanov |
| Abstract: | The question of formulation of a social planner criterion for an imperfect economy is examined using an example of a polluting economy negatively affected by growing temperature. Imperfection of the economy is expressed here in deviations from the optimal initial state. It is shown that a criterion not linked to a specific initial state almost always implies either unsustainable or inefficient paths in the economy. In this paper, I link the constant-utility criterion to the initial amount of the resource reserve. This criterion implies efficient resource use and the paths of utility asymptotically approaching some constants, which depend on the parameters of the temperature function. The criterion can be formulated for the cases when the reserve estimate changes over time and when the high level of temperature can cause extinction. |
| Keywords: | Essential nonrenewable resource, imperfect polluting economy, economy-linked criterion, semisustainable development, semiefficient extraction. |
| JEL: | O13 Q32 Q38 |
| Date: | 2009–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2009_03&r=upt |
| By: | María Dolores Furió (Universitat de València); Vicente Meneu (Universitat de València) |
| Abstract: | To analyse the forward risk premium in the Spanish electricity market, we adopt not only an ex post approach, but also an ex ante. We find that the sign of the ex post forward premium depends on the unexpected variation in demand and on the unexpected variation in the hydro-energy capacity, and that the ex ante forward premium varies with the expected demand in tight market conditions, showing that the participation of forward dealing agents in the Spanish market responds to risk considerations. Moreover, we find support for the implications derived from the Bessembinder & Lemmon (2002) equilibrium model. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-02&r=upt |
| By: | Jerry Busemeyer; Ariane Lambert-Mogiliansky |
| Abstract: | The Type Indeterminacy model is a theoretical framework that formalizes the constructive preference perspective suggested by Kahneman and Tversky. In this paper we explore an extention of the TI-model from simple to strategic decision-making. A 2X2 game is investigated. We first show that in a one-shot simultaneaous move setting the TI-model is equivalent to a standard incomplete information model. We then let the game be preceded by a cheap-talk promise exchange game. We show in an example that in the TI-model the promise stage can have impact on next following behavior when the standard classical model predicts no impact whatsoever. The TI approach differs from other behavioral approaches in identifying the source of the effect of cheap-talk promises in the intrinsic indeterminacy of the players' type. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2009-07&r=upt |
| By: | Leif Brandes (Institute for Strategy and Business Economics, University of Zurich); Katja Rost (Institute of Organization and Administrative Science, University of Zurich) |
| Abstract: | Recent evidence shows that individual traders act surprisingly systematic. This paper analyzes the factors that cause such behavior. Using survey data for more than 300 individuals, we support previous results and provide a simple explanation for this: the strong tendency of individuals to rely on media information for investment purposes. We are the first to study media impact by analyzing an individualÕs propensity to buy stocks while controlling for a broad class of individual characteristics. We show that the media are the only information resource within our study, for which the marginal effect on the propensity to buy stocks increases substantially (from 48% to 89%) when controlling for investment motives, preferred asset classes, personal financial experience, and gender. While we explain the importance of the media by the notion of persuasion bias and overconfidence, our results imply that the impact of media on markets increases substantially if noise traders become more homogeneous as a group. We conclude that the relation between media influence and homogeneity of traders can be one important driver for speculative bubbles. |
| Keywords: | noise traders; selection models; media |
| JEL: | C25 D83 G11 G14 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:iso:wpaper:0098&r=upt |
| By: | Basov, Suren; Danilkina, Svetlana; Prentice, David |
| Abstract: | Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model, which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties. |
| Keywords: | Price discrimination; product variety; bounded rationality; cars. |
| JEL: | L11 L62 D8 L15 D4 |
| Date: | 2009–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13445&r=upt |