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on Utility Models and Prospect Theory |
| By: | Gaudecker, H.M. von; Soest, A.H.O. van; Wengstrom, E. (Tilburg University, Center for Economic Research) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200912&r=upt |
| By: | Atkinson, Giles D.; Dietz, Simon; Helgeson, Jennifer; Hepburn, Cameron; Sælen, Håkon |
| Abstract: | Arguments about the appropriate discount rate often start by assuming a Utilitarian social welfare function with isoelastic utility, in which the consumption discount rate is a function of the (constant) elasticity of marginal utility along with the (much discussed) utility discount rate. In this model, the elasticity of marginal utility simultaneously reflects preferences for intertemporal substitution, aversion to risk, and aversion to (spatial) inequality. While these three concepts are necessarily identical in the standard model, this need not be so: well-known models already enable risk to be separated from intertemporal substitution. Separating the three concepts might have important implications for the appropriate discount rate, and hence also for long-term policy. This paper investigates these issues in the context of climate-change economics, by surveying the attitudes of over 3000 people to risk, income inequality over space and income inequality over time. The results suggest that individuals do not see the three concepts as identical, and indeed that preferences over risk, inequality and time are only weakly correlated. As such, relying on empirical evidence of risk or inequality preferences may not necessarily be an appropriate guide to specifying the elasticity of intertemporal substitution. |
| Keywords: | Climate change, discounting, risk aversion, intertemporal substitution, inequality aversion, intergenerational equity |
| JEL: | C90 D01 D63 Q51 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7493&r=upt |
| By: | David M. Bruner |
| Abstract: | There are two means of changing the expected value of a risk: changing the probability of a reward or changing the reward. Theoretically, the former produces a greater change in expected utility for risk averse agents. This paper uses two formats of a risk preference elicitation mechanism under two decision frames to test this hypothesis. After controlling for decision error, probability weighting, and order effects, subjects, on average, are slightly risk averse and prefer an increase in the expected value of a risk due to increasing the probability over a compensated increase in the reward. There is substantial across-format inconsistency but very little within-format inconsistency at the individual level. Key Words: risk, uncertainty, experiments |
| JEL: | C91 D81 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:09-04&r=upt |
| By: | Riera, Antoni; Hanley, Nick; Torres, Cati |
| 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 (CE) 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: | Monte Carlo analysis; choice experiments; efficiency; accuracy; welfare measurement; attributes; utility specification |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2009-07&r=upt |
| By: | Francesco Farina; Fulvio Fontini |
| Abstract: | We set a model in which a population of individuals is segmented in the labour market into two groups: high-skill workers and low-skill ones. Risk exposure consists of a macroeconomic employment risk for which the two groups have diverging probabilities. We investigate how risk affects preferences on the optimal level of the tax rate and show that a crucial role is played by workers’ risk-attitude in advanced and backward economies. In the former, overall production increases as low-skills’ working perspectives worsen, while the opposite is true for the latter. In the first case, a crucial role is played by low-skill workers, whose behaviour depends on their degree of risk aversion: low-skill high-risk averse individuals will chose a lower tax rate as their risk rises, while the opposite is true for both the low-skill low-risk-averse workers and the high-skill ones. In the case of backward economies, both the high-skills high-risk-averse and the low-skill individuals choose a lower tax rate as their risk increases, while the opposite is true for high-skills low risk-averse workers. |
| Keywords: | Constant Relative Risk aversion, Optimal Tax Rate, Workers’ Heterogeneity. |
| JEL: | H30 H21 J24 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:usi:depfid:0109&r=upt |
| By: | Sandra Lizarazo (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | This paper develops a quantitative model of debt and default for small open economies that interact with risk averse international investors. The model developed here extends the recent work on the analysis of endogenous default risk to the case in which international investors are risk averse agents with decreasing absolute risk aversion (DARA). By incorporating risk averse investors who trade with a single emerging economy, the present model oers two main improvements over the standard case of risk neutral investors: i.) the model exhibits a better fit of debt-to-output ratio and ii.) the model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets. The paper shows that if investors have DARA preferences, then the emerging economy’s default risk, capital flows, bond prices and consumption are a function not only of the fundamentals of the economy—as in the case of risk neutral investors—but also of the level of financial wealth and risk aversion of the international investors. In particular, as investors become wealthier or less risk averse, the emerging economy becomes less credit constrained. As a result, the emerging economy’s default risk is lower, and its bond prices and capital inflow are higher. Additionally, with risk averse investors, the risk premium in the asset prices of the sovereign countries can be decomposed into two components: a base premium that compensates the investors for the probability of default (as in the risk neutral case) and an “excess” premium that compensates them for taking the risk of default. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0905&r=upt |
| By: | Booth, Alison L. (Australian National University); Nolen, Patrick J. (University of Essex) |
| Abstract: | Women and men may differ in their propensity to choose a risky outcome because of innate preferences or because their innate preferences are modified by pressure to conform to gender-stereotypes. Single-sex environments are likely to modify students’ risk-taking preferences in economically important ways. To test this, our controlled experiment gave subjects an opportunity to choose a risky outcome − a real-stakes gamble with a higher expected monetary value than the alternative outcome with a certain payoff − and in which the sensitivity of observed risk choices to environmental factors could be explored. The results show that girls from single-sex schools are as likely to choose the real-stakes gamble as much as boys from either coed or single sex schools, and more likely than coed girls. Moreover, gender differences in preferences for risk-taking are sensitive to the gender mix of the experimental group, with girls being more likely to choose risky outcomes when assigned to all-girl groups. This suggests that observed gender differences in behaviour under uncertainty found in previous studies might reflect social learning rather than inherent gender traits. |
| Keywords: | gender identity, controlled experiment, risk aversion, risk attitudes, |
| JEL: | C9 C91 C92 J16 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4026&r=upt |
| By: | Maria Cristina Colorito |
| Abstract: | In the traditional models of customer markets it can be identified a price rigidity due to the existence of a discontinuity in the firm’s marginal revenue curve. This paper presents a microeconomic model that combines the hypothesis of a risk-averse pricesetting firm with the customer markets analysis. We show that, when a shock to marginal cost moves marginal cost curve outside the discontinuity range of marginal revenue curve, the adjustment of price under risk aversion tends to be more sluggish than under risk neutrality and a sufficiently great risk aversion implies price inertia. |
| JEL: | D21 D81 D82 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dsc:wpaper:2&r=upt |
| By: | Jeffrey LaFrance; Rulon Pope; Richard Just (School of Economic Sciences, Washington State University) |
| Abstract: | A structural inter-temporal model of agricultural asset arbitrage equilibrium is developed and applied to agriculture in the North-Central region of the U.S. The data is consistent with a unifying level of risk aversion. The levels of risk aversion are more plausible than previous estimates for agriculture. However, the standard arbitrage equilibrium is rejected; perhaps this is due to the period and the shortness of the period studied. |
| Keywords: | arbitrage, risk aversion, agriculture |
| JEL: | G11 Q12 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:lafrance-3&r=upt |
| By: | Hermann Brandstätter (University of Linz); Werner Güth (Max Planck Institute of Economics, Jena, Germany); Hartmut Kliemt (Frankfurt School of Finance & Management, Frankfurt am Main, Germany) |
| Abstract: | During the last three decades the ascent of behavioral economics clearly helped to bring down artificial disciplinary boundaries between psychology and economics. Noting that behavioral economics seems still under the spell of the rational choice tradition - and, indirectly, of behaviorism - we scrutinize in an exemplary manner how the development of some kind of "cognitive economics" might mirror the rise of "cognitive psychology" without endangering the advantages of the division of labor and of disciplinary specialization. |
| Keywords: | bounded rationality, game theory, satisficing, interdisciplinary research, experimental economics, economic psychology |
| JEL: | B31 B41 C72 C73 C78 D63 |
| Date: | 2009–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-017&r=upt |
| By: | Marco Faravelli (School of Economics and Finance, University of St. Andrews); Oliver Kirchkamp (Department of Economics, University of Jena, Germany); Helmut Rainer (School of Economics and Finance, University of St. Andrews) |
| Abstract: | We explore experimentally how power asymmetries between partners affect relationship-specific investments. We find that on average players’ investments are larger than equilibrium investments. In contrast to social dilemma experiments, in our experiment preferences for social welfare and those for equality call for different actions. Surprisingly, even disadvantaged players care more for social welfare and less for equality. As a result social welfare increases but so does inequality. We then study conditions under which power-advantaged players give up power. Power-sharing can be successful in the experiment, even when it is not in a selfish world. |
| Keywords: | Experiments, Incomplete Contracts, Relationship-Specific Investment, Allocation of Power, Social Preferences |
| JEL: | C91 D23 D86 |
| Date: | 2009–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-016&r=upt |
| By: | Sudipta Sarangi; Tibor Besedes; Cary Deck; Mikhael Shor |
| Abstract: | We examine in controlled experiments how individuals make choices when faced with multiple options. The choice tasks mimic the selection of health insurance, prescription drug, or retirement savings plans. However, in our experiment, the available options can be objectively ranked. We find that the probability of a person selecting the optimal option declines as the number of options increases, with the decline more pronounced for older subjects. Heuristics seem to differ by age with older subjects relying more on suboptimal decision rules. Behavior consistent with the estimated decision rules is observed in an out-of-sample experiment. |
| URL: | http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2009-03&r=upt |