nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒03‒22
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Rational behaviour, Risk aversion, High stakes for society By André De Palma
  2. A New Example of a Closed Form Mean-Variance Representation By Keith R. McLaren
  3. Misbehavioral urban economics By Berliant, Marcus
  4. Gender Differences in Risk Aversion and Ambiguity By Lex Borghans; Bart H.H. Golsteyn; James J. Heckman; Huub Meijers
  5. Risk aversion, the value of information and traffic equilibrium By André De Palma; Robin Lindsey; Nathalie Picard
  6. On Inequity Aversion A Reply to Binmore and Shaked By Ernst Fehr; Klaus M. Schmidt
  7. State-Uncertainty preferences and the Risk Premium in the Exchange rate market By Juan-Angel Jimenez-Martin; Alfonso Novales Cinca
  8. Broken Promises: An Experiment By Gary Charness; Martin Dufwenberg
  9. Social welfare versus inequality aversion in an incomplete contract experiment By Marco Faravelli; Oliver Kirchkamp; Helmut Rainer
  10. A Test of the Rational Expectations Hypothesis using data from a Natural Experiment By Anna Conte; Peter G. Moffatt; Fabrizio Botti; Daniela T. Di Cagno; Carlo D'Ippoliti
  11. The State Street Mile: Age and Gender Differences in Competition-Aversion in the Field By Rod Garratt; Catherine Weinberger; Nicholas Johnson

  1. By: André De Palma (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan)
    Abstract: Certain areas related to the topics under discussion here lie outside my field; for instance the evaluation of risk assessment and security deficiencies in the transport sector. What has convinced me of the importance of this subject are a few very general conclusions, indeed I would say, impressions, that I have drawn from the truly remarkable development of our powers to analyse the risk decision-making process over some years now.
    Keywords: Risk, uncertainty, home security, expected utility, non-expected utility, OECD
    Date: 2008–10
  2. By: Keith R. McLaren
    Abstract: In most finance papers and textbooks mean-variance preferences are usually introduced and motivated as a special case of expected utility theory. In general, the two sufficient conditions to allow this are either quadratic preferences with an arbitrary distribution of stochastic assets, or arbitrary preferences with Normally distributed assets. In the first case, the specific functional form of mean-variance preferences follows naturally. In the second case, the only specific functional form usually provided is the case of negative exponential preferences. In this note, the specific functional form for mean-variance preferences is derived for the much more realistic example of lognormally distributed assets, and constant relative risk aversion (CRRA) preferences.
    Keywords: Mean-variance preferences; expected utility; lognormal assets; risk aversion
    JEL: D81 G11
    Date: 2009–02
  3. By: Berliant, Marcus
    Abstract: Applications of the framework of behavioral economics to questions arising from urban economics are discussed. Directions for future research are outlined.
    Keywords: behavioral urban economics; ambiguity aversion; loss aversion; regional art
    JEL: C90 R23
    Date: 2009–03–17
  4. By: Lex Borghans (Maastricht University); Bart H.H. Golsteyn (Maastricht University and IZA); James J. Heckman (University of Chicago and University College Dublin); Huub Meijers (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.
    Date: 2009–03–09
  5. By: André De Palma (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan); Robin Lindsey (University of Alberta - University of Alberta); Nathalie Picard (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: Information about traffic conditions has traditionally been conveyed to drivers by radio and variable message signs, and more recently via the Internet and Advanced Traveler Information Systems. This has spurred research on how travelers respond to information, how much they are willing to pay for it and how much they are likely to benefit from it collectively. In this paper we analyze the decisions of drivers whether to acquire information and which route to take on a simple congested road network. Drivers vary in their degree of risk aversion with respect to travel time. Four information regimes are considered: No information, Free information which is publicly available at no cost, Costly information which is publicly available for a fee, and Private information which is available free to a single individual. Private information is shown to be individually more valuable than either Free or Costly information, while the benefits from Free and Costly information cannot be ranked in general. Free or Costly information can decrease the expected utility of drivers who are very risk-averse, and with sufficient risk aversion in the population the aggregate compensating variation for information can be negative.
    Keywords: Transportation, route choice, information provision, expected utility, congestion
    Date: 2008–12
  6. By: Ernst Fehr; Klaus M. Schmidt (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland; Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Munich, Germany)
    Abstract: In this paper we reply to Binmore and Shaked’s criticism of the Fehr-Schmidt model of inequity aversion. We put the theory and their arguments into perspective and show that their criticism is not substantiated. Finally, we briefly comment on the main challenges for future research on social preferences.
    Keywords: Experiments, other-regarding preferences, inequity aversion
    JEL: B41 C90
    Date: 2009–02
  7. By: Juan-Angel Jimenez-Martin (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense); Alfonso Novales Cinca (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense)
    Abstract: This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: “macroeconomic risk” and “the risk associated with variation in the private agents’ perception on the level of uncertainty”. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model
    Date: 2009
  8. By: Gary Charness (University of California, Santa Barbara); Martin Dufwenberg
    Abstract: We test whether promises per se are effective in enhancing cooperative behavior in a form of trust game. In a new treatment, rather than permitting free-form messages, we instead allow only a bare promise-only message to be sent (or not). We find that bare promises are much less effective in achieving good social outcomes than free-form messages; in fact, bare promise-only messages lead to behavior that is much the same as when no messages are feasible. Our design also permits us to test the predictions of guilt aversion against the predictions of lying aversion. Our experimental results provide evidence that mainly supports the guilt-aversion predictions, but we also find some support for the presence of lying aversion.
    Keywords: Behavioral economics, cheap talk, communication, cost-of-lying, credibility, guilt aversion, psychological game theory, promises,
    Date: 2008–08–06
  9. By: Marco Faravelli; Oliver Kirchkamp; Helmut Rainer
    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
  10. By: Anna Conte (University of Westminster); Peter G. Moffatt (School of Economics, University of East Anglia); Fabrizio Botti (Department of Social, Economic, Actuarial and Demographic Studies, Sapienza University of Rome); Daniela T. Di Cagno (Department of Economic and Business Sciences, LUISS Guido Carli); Carlo D'Ippoliti (Department of Social, Economic, Actuarial and Demographic Studies, Sapienza University of Rome)
    Abstract: Data on contestantsÕ choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. The most important issue addressed in the paper is what belief function is actually being used by contestants. The parameters of this function are estimated freely along with the parameters of a choice model. Separate identification of the belief function and preferences is possible by virtue of the fact that at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the ÒtrueÓ offer function which is estimated using data on offers actually made to contestants. We find that there is a significant difference between these two functions, and hence we reject the rational expectations hypothesis. However, when a simpler Òrule-of-thumbÓ structure is assumed for the belief function, we find a correspondence to the function obtained from data on actual offers. Our overall conclusion is that contestants are rational to the extent that they make use of all available relevant information, but are not fully rational because they are not processing the information in an optimal way. The importance of belief-formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward-looking as opposed to myopic.
    Keywords: Beliefs, Discrete choice models, Method of simulated likelihood, Natural Experiments, rational expectations, risky choice
    JEL: C15 C23 C25 D81
    Date: 2009–01
  11. By: Rod Garratt (University of California, Santa Barbara); Catherine Weinberger (Institute for Social, Behavioral & Economics, UCSB); Nicholas Johnson
    Abstract: Gender differences in "competitiveness," previously documented in laboratory experiments, are hypothesized to play a role in a wide array of economic outcomes. The current paper provides evidence of competition-aversion in a natural setting somewhere between the simplicity of a laboratory experiment and the full complexity and ambiguity of a labor market. The "State Street Mile" race offers both male and female participants a choice between two different levels of competition. Large, systematic age and gender differences are observed in the relationship between true ability and the decision to enter the more competitive race. Overall, qualified women and older runners are far less likely than qualified young men to enter a competitive race with cash prizes. However, the fastest young women unanimously enter the competitive race. Therefore, while we confirm age and gender differences in competitiveness in our field setting, the economic consequences to capable young women are rather small.
    Keywords: competition-aversion, age, gender,
    Date: 2009–03–01

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