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on Utility Models and Prospect Theory |
| By: | Nagore Iriberri; Pedro Rey-Biel |
| Abstract: | We compare behavior in modified dictator games with and without role uncertainty. Costly surplus creating actions are most frequent with role uncertainty while selfish behavior is most frequent without role uncertainty. A classification of subjects into four different types of preferences (Selfish, Social Welfare maximizing, Inequity Averse and Competitive) shows that role uncertainty overestimates (underestimates) the prevalence of Social Welfare maximizing (Selfish and Inequity Averse) preferences in the subject population. Our results have important methodological implications for experiments used to measure the prevalence of interdependent preferences. |
| Keywords: | Role uncertainty, role reversal, interdependent preferences, social welfare, maximizing, inequity aversion, mixture-of-types models, strategy method, experiments, LeeX |
| JEL: | C72 C91 D81 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1147&r=upt |
| By: | Luc LAUWERS |
| Abstract: | The existence of a Paretian and finitely anonymous ordering in the set of infinite utility streams implies the existence of a non-Ramsey set (a nonconstructive object whose existence requires the axiom of choice). Therefore, each Paretian and finitely anonymous quasi-ordering either is incomplete or does not have an explicit description. Hence, the possibility results of Svensson (1980) and of Bossert, Sprumont, and Suzumura (2006) do require the axiom of choice. |
| Keywords: | Intergenerational justice; Pareto; Multi-period social choice; Axiom of choice; Constructivism. |
| JEL: | D60 D70 D90 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces09.04&r=upt |
| By: | Nicole Branger; Holger Kraft; Christoph Meinerding |
| Abstract: | Stocks are exposed to the risk of sudden downward jumps. Additionally, a crash in one stock (or index) can increase the risk of crashes in other stocks (or indices). Our pape explicitly takes this contagion risk into account and studies its impact on the portfolio decision of a CRRA investor both in complete and in incomplete market settings. We find that the investor significantly adjusts his portfolio when contagion is more likely to occur. Capturing the time dimension of contagion, i.e. the time span between jumps in two stocks or stock indices, is thus of first-order importance when analyzing portfolio decisions. Investors ignoring contagion completely or accounting for contagion while ignoring its time dimension suffer large and economically significant utility losses. These losses are larger in complete than in incomplete markets, and the investor might be better off if he does not trade derivatives. Furthermore, we emphasize that the risk of contagion has a crucial impact on investors' security demands, since it reduces their ability to diversify their portfolios. |
| JEL: | G12 G13 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:fra:franaf:198&r=upt |
| By: | Dominique, C-Rene |
| Abstract: | The assumption that markets are positive linear structures moving toward stable fixed-point equilibria is not supproted by empirical investigations.This note reformulates the purest and the simplestof all Walrasian models, i. e.,a pure exchange economy, and shows that even such a simple market moves toward a compact time-invariant set of prices due to the constant destruction and creation of excess demands under the impulsion of self-interested agents with strong monotone preferences. Fractal attractors better explain continuous market fluctuations, 'black swans', and the flawed risk assessments of market risks of the financial engineers of Wall Street. |
| Keywords: | Market Equilibria; Market Fluctuations; Black Swans; Risk Assessment |
| JEL: | D50 |
| Date: | 2009–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13624&r=upt |
| By: | James Bullard; George Evans; Seppo Honkapohja |
| Abstract: | We study how the use of judgement or “add-factors” in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria. learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation. |
| Keywords: | Learning, expectations, excess volatility, bounded rationality. |
| JEL: | E52 E61 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0902&r=upt |