|
on Utility Models and Prospect Theory |
| By: | von Gaudecker, Hans-Martin (Free University Amsterdam); van Soest, Arthur (Tilburg University); Wengström, Erik (University of Copenhagen) |
| Abstract: | We analyse risk preferences using an experiment with real incentives in a representative sample of 1,422 Dutch respondents. Our econometric model incorporates four structural parameters that vary with observed and unobserved characteristics: Utility curvature, loss aversion, preferences towards the timing of uncertainty resolution, and the propensity to choose randomly rather than on the basis of preferences. We find that all four parameters contribute to explaining choice behaviour. The structural parameters are significantly associated with socio-economic variables, but it is essential to incorporate unobserved heterogeneity in each of them to match the rich variety of choice patterns in the data. |
| Keywords: | risk aversion, loss aversion, uncertainty resolution, field experiments |
| JEL: | C90 D81 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4022&r=upt |
| By: | TREICH Nicolas |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ler:wpaper:09.05.281&r=upt |
| By: | Steinbacher, Matjaz |
| Abstract: | A social network has been used to simulate how agents of different levels of risk aversion under different circumstances behave in financial markets when deciding between risk-free and a risky asset. This is done by a discrete time version evolutionary game of risk-loving and risk-averse agents. The evolutionary process takes place on a social network through which investors acquire information they need to choose the strategy. A significant feature of the paper is that first-order stochastic dominance is a key determinant of the decision-making, while second-order stochastic dominance is not, with the level of omniscience and preferences of agents also having a significant role. Under most of the circumstances, pure risk-aversion turns out to be dominated strategy, while pure risk-taking “almost” dominant. |
| Keywords: | social networks; portfolio analysis; stochastic finance; stochastic dominance |
| JEL: | G11 Z13 C73 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13569&r=upt |
| By: | Blass, Asher; Lach, Saul; Manski, Charles |
| Abstract: | When data on actual choices are not available, researchers studying preferences sometimes pose choice scenarios and ask respondents to state the actions they would choose if they were to face these scenarios. The data on stated choices are then used to estimate random utility models, as if they are data on actual choices. Stated choices may differ from actual ones because researchers typically provide respondents with less information than they would have facing actual choice problems. Elicitation of choice probabilities overcomes this problem by permitting respondents to express uncertainty about their behavior. This paper shows how to use elicited choice probabilities to estimate random utility models with random coefficients and applies the methodology to estimate preferences for electricity reliability in Israel. |
| Keywords: | Choice probabilities; stated choices; WTP for electricity reliability |
| JEL: | C2 C25 C42 D12 L51 L94 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7030&r=upt |
| By: | Holger Kraft; Frank Seifried |
| Abstract: | This paper relates recursive utility in continuous time to its discrete-time origins and provides a rigorous and intuitive alternative to a heuristic approach presented in [Duffie, Epstein 1992], who formally define recursive utility in continuous time via backward stochastic differential equations (stochastic differential utility). Furthermore, we show that the notion of Gâteaux differentiability of certainty equivalents used in their paper has to be replaced by a different concept. Our approach allows us to address the important issue of normalization of aggregators in non-Brownian settings. We show that normalization is always feasible if the certainty equivalent of the aggregator is of expected utility type. Conversely, we prove that in general L´evy frameworks this is essentially also necessary, i.e. aggregators that are not of expected utility type cannot be normalized in general. Besides, for these settings we clarify the relationship of our approach to stochastic differential utility and, finally, establish dynamic programming results. |
| JEL: | D81 D91 C61 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:fra:franaf:196&r=upt |
| By: | Siddiqi, Hammad |
| Abstract: | It is difficult to explain the price insensitive or infra-marginal behavior, an example of which is the behavior of credit markets during the recent financial crisis, by risk aversion alone. It is known that infra-marginal behavior may arise with ambiguity aversion. Furthermore, there appears to be fairly strong evidence of a close connection between ambiguity and conformity. Here we propose an extension of the standard ambiguity framework to incorporate conformity. We find that there are open sets of state-price ratios over which the entire market is price insensitive or infra-marginal. This result has important implications for market equilibrium and volatility |
| Keywords: | Ambiguity; Infra-Marginal Behavior; Arrow Securities |
| JEL: | G0 G10 |
| Date: | 2009–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13514&r=upt |
| By: | Catalina M. Torres Figuerola (Centre de Recerca Econòmica (UIB · Sa Nostra)); Nick Hanley (Department of Economics, University of Stirling); Antoni Riera Font (Centre de Recerca Econòmica (UIB · Sa Nostra)) |
| Abstract: | Despite the vital role of utility functional form in welfare measurement, the implications of working with incorrect utility specifications have not been examined in the choice experiments literature. This paper addresses the importance of the specification of both non-monetary attributes and the marginal utility of income. Monte Carlo experiments have been conducted wherein different attribute specifications and assumptions for the Cost parameter -that is, different functional forms of utility- have been assumed to generate simulated choices on which Multi-Nomial Logit and Mixed Logit models have been estimated under correct and incorrect assumptions about the true, underlying utility function. The inferred values have been compared with the true ones directly calculated from the true utility specifications. Results show that working with simple experimental designs and continuous-linear specifications makes attribute specification irrelevant for measuring attribute marginal values regardless of the true effects the attribute has on utility. |
| Keywords: | Utility specification, attributes, welfare measurement, accuracy, efficiency, choice experiments, Monte Carlo analysis |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pdm:wpaper:2008/6&r=upt |
| By: | Miles S. Kimball; Claudia R. Sahm; Matthew D. Shapiro |
| Abstract: | Survey measures of preference parameters provide a means for accounting for otherwise unobserved heterogeneity.This paper presents measures of relative risk tolerance based on responses to survey questions about hypothetical gambles over lifetime income.It discusses how to impute estimates of utility function parameters from the survey responses using a statistical model that accounts for survey response error. There is substantial heterogeneity in true preference parameters even after survey response error is taken into account.The paper discusses how to use the preference parameters imputed from the survey responses in regression models as a control for differences in preferences across individuals. This paper focuses on imputations for respondents in the Panel Study of Income Dynamics (PSID).It also studies the covariation of risk preferences among members of households.It finds fairly strong covariation in attitudes about risk -- between parents and children and especially between siblings and between spouses. |
| JEL: | C42 D12 D81 E21 J12 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14754&r=upt |
| By: | De Paoli, Bianca (Bank of England); Zabczyk, Pawel (Bank of England) |
| Abstract: | Empirical evidence suggests that risk premia are higher at business cycle troughs than they are at peaks. Existing asset pricing theories ascribe moves in risk premia to changes in volatility or risk aversion. Nevertheless, in a simple general equilibrium model, risk premia can be procyclical even though the volatility of consumption is constant and despite a countercyclically varying risk aversion coefficient. We show that agents' expectations about future prospects also influence premium dynamics. In order to generate countercyclically varying premia, as found in the data, one requires a combination of hump-shaped consumption dynamics or highly persistent shocks and habits. Our results, thus, suggest that factors which help match activity data may also help along the asset pricing dimension. |
| Date: | 2009–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0361&r=upt |
| By: | Guiso, Luigi |
| Abstract: | I provide a test of narrow framing to explain why individuals turn down small positive expected value lotteries. Participants in a large survey have been asked whether they would accept a small lottery of winning 180 euros with probability of 1/2 or losing 100 euros with the same probability. To half of the sample, randomly selected, the lottery question was asked at the beginning of the interview; the other half made the decision immediately after they were asked to think about and report their subjective probability distribution of future earnings. Consistent with narrow framing, I find that individuals that were induced to bring their earnings risk to mind before facing the decision are significantly less likely to turn it down. Furthemore, only those who actually say they are uncertain about their incomes are less likely to reject the lottery. I show that attitudes towards regret and reliance on intuition rather than reasoning are likely to drive the tendency to frame choices narrowly. |
| Keywords: | intuitive thinking; loss aversion; Narrow framing; reasoning; regret |
| JEL: | D1 D8 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7112&r=upt |
| By: | Robertas Zubrickas |
| Date: | 2009–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000130&r=upt |
| By: | Blanchflower, David G. (Dartmouth College); Oswald, Andrew J. (University of Warwick); Van Landeghem, Bert (Catholic University of Leuven) |
| Abstract: | If human beings care about their relative weight, a form of imitative obesity can emerge (in which people subconsciously keep up with the weight of the Joneses). Using Eurobarometer data on 29 countries, this paper provides cross-sectional evidence that overweight perceptions and dieting are influenced by a person’s relative BMI, and longitudinal evidence from the German Socioeconomic Panel that well-being is influenced by relative BMI. Highly educated people see themselves as fatter − at any given actual weight − than those with low education. These results should be treated cautiously, and fixed-effects estimates are not always well-determined, but there are grounds to take seriously the possibility of socially contagious obesity. |
| Keywords: | mental health, dieting, peer effects, happiness, imitation, comparisons, body mass index BMI, well-being, obesity |
| JEL: | D1 I12 I31 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4010&r=upt |