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on Utility Models and Prospect Theory |
| By: | Mark Voorneveld (SSE - Department of Economics - Stockholm School of Economics); Jörgen Weibull (SSE - Department of Economics - Stockholm School of Economics, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | In most economics textbooks there is a gap between the non-existence of utility functions and the existence of continuous utility functions, although upper semi-continuity is sufficient for many purposes. Starting from a simple constructive approach for countable domains and combining this with basic measure theory, we obtain necessary and sufficient conditions for the existence of upper semi-continuous utility functions on a wide class of domains. Although links between utility theory and measure theory have been pointed out before, to the best of our knowledge this is the first time that the present route has been taken. |
| Keywords: | preferences, utility theory, measure theory, outer measure |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00354246_v1&r=upt |
| By: | Christiane Bradler (Friedrich-Schiller-University Jena) |
| Abstract: | The literature on social preferences provides overwhelming evidence of departures from pure self-interest of individuals. Experiments show that people care about others' well-being and their relative standing. This paper investigates whether this type of behavior persists when risk comes into play. I devise an experiment which sheds light on the interrelation of risk and social preferences by measuring (1) individual risk preferences, (2) interpersonal risk preferences, and (3) social preferences under certainty. The results reveal that a large share of subjects choose to accept more risk or less potential gain than individually preferred in order to increase another subject’s payoff. Further, the willingness to do so appears to be influenced by the "need" of the other person and her potential relative standing. Surprisingly, the results do not suggest that a subject’s social behavior under risk is related to his exhibited social concerns exhibited under certainty. |
| Keywords: | social preferences, risk, other-regarding behavior, inequality aversion |
| JEL: | D81 D63 C91 |
| Date: | 2009–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-022&r=upt |
| By: | Fernandez, Pablo |
| Abstract: | The equity premium (also called market risk premium, equity risk premium, market premium and risk premium), is one of the most important, discussed but elusive parameters in finance. The term equity premium is used to designate four different concepts (although many times they are mixed): Historical Equity Premium (HEP), Expected Equity Premium (EEP); Required Equity Premium (REP) and Implied Equity Premium (IEP). It has been argued that, from an economic standpoint, we need to establish the primacy of the EEP, since it is what guides investors' decisions. However, the REP is more important for many important decisions, among others, valuations of projects and companies, acquisitions, and corporate investment decisions. The EEP is important only for the investors that hold the market portfolio. |
| Keywords: | equity premium puzzle; required equity premium; historical equity premium |
| JEL: | G12 G31 G10 |
| Date: | 2009–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14221&r=upt |
| By: | Nicolas Houy (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | In this paper, we study the relationships between binary lexicographic composition of rationales (see [Tadenuma, 2002]), prudent choices (see [Houy, 2008a]) and refined prudent choices (see [Houy, 2008b]) in the case of multi-criteria decision making. We show that these relationships are linked to the non-emptiness and rationality properties of these choice functions. |
| Keywords: | Prudent choices, multi-criteria decision making. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00360518_v1&r=upt |
| By: | Mohamed Belhaj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579, ECM - Ecole Centrale de Marseille - Ecole Centrale de Marseille); Frédéric Deroïan (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | We revisit the common view that risk sharing enhances risk taking in the context of heterogenous risk sharing in a small economy. Under low volumes of transfers, we express individual risk level in terms of Bonacich measure. We find that heterogeneity combined to strategic interaction imply that risk sharing enhances risk taking only in average. However, under high transfer volumes, risk sharing may reduce risk taking. We also provide conditions under which agents under or over invest with respect to the risk allocation maximizing the sum of profits. |
| Keywords: | Risk taking ; Heterogenous risk sharing ; Strategic Interactions ; Bonacich measure |
| Date: | 2009–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00369889_v1&r=upt |
| By: | Strassmair, Christina |
| Abstract: | Consider a situation where person A undertakes a costly action that benefits person B. This behavior seems altruistic. However, if A expects a reward in return from B, then A's action may be motivated by the expected rewards rather than by pure altruism. The question we address in this experimental study is how B reacts to the intentions of A. We vary the probability, with which the second mover in a trust game can reciprocate, and analyze effects on second mover behavior. Our results suggest that the perceived kindness and its rewards are not spoiled by expected rewards. |
| Keywords: | social preferences; intentions; beliefs; psychological game theory; experiment |
| JEL: | D02 C91 D64 |
| Date: | 2009–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:10351&r=upt |
| By: | Rochelle Guttmann; Ryan Castle; Denzil G. Fiebig (CHERE, University of Technology, Sydney) |
| Abstract: | The vast majority of stated preference research in health economics has been conducted in the random utility model paradigm using discrete choice experiments (DCEs). Ryan and Gerard (2003) have reviewed the applications of DCEs in the field of health economics. We have updated this initial work to include studies published between 2001 and 2007. Following the methods of Ryan and Gerard, we assess the later body of work, with respect to the key characteristics of DCEs such as selection of attributes and levels, experimental design, preference measurement, estimation procedure and validity. Comparisons between the periods are undertaken in order to identify any emerging trends. |
| Keywords: | discrete choice experiments, health economics |
| JEL: | I10 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:her:chewps:2009/2&r=upt |
| By: | Li, GuangJie (Cardiff Business School) |
| Abstract: | We study how stock return's predictability and model uncertainty affect a rational buy-and-hold investor's decision to allocate her wealth for different lengths of investment horizons in the UK market. We consider the FTSE All-Share Index as the risky asset, and the UK Treasury bill as the riskless asset in forming the investor's portfolio. We identify the most powerful predictors of the stock return by accounting for model uncertainty. We find that though stock return predictability is weak, it can still affect the investor's optimal portfolio decision over different investment horizons. |
| Keywords: | Bayesian Model Averaging; SUR model; stock return predictability; portfolio choice |
| JEL: | C39 G11 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/4&r=upt |
| By: | Nicolas Houy (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | We charaterize the choice correspondences that can be rationalized by a procedure that is a refinement of the prudent choices exposed in [Houy, 2008]. Our characterization is made by means of the usual expansion axiom and by a weakening of the usual contraction axiom α. |
| Keywords: | Prudent choices, multi-criteria decision making. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00360523_v1&r=upt |
| By: | Pouliakas, Konstantinos; Theodossiou, Ioannis |
| Abstract: | This study attempts to estimate the ‘utility cost’ of temporary employment contracts purged of the psychological effects of adaptation. A conjoint analysis experiment is used that examines the ex-ante contract preferences of a unique sample of low-skilled employees from 7 European countries. It is shown that permanent contract holders request a significant wage premium to move to a temporary job. In contrast, temporary workers are indifferent between permanent and temporary contracts, ceteris paribus. The evidence suggests that individuals have a psychological immune system which neutralises events that challenge their sense of well-being, such as job insecurity. The methodology developed in this paper can provide policymakers with an alternative and relatively inexpensive method of quantifying the transitional loss (or gain) in welfare that individuals might experience in response to changing labour market policies. |
| Keywords: | Utility; Temporary contracts; Adaptation; Conjoint analysis |
| JEL: | J31 J41 C25 |
| Date: | 2008–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14166&r=upt |
| By: | Nicolas Houy (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | In this paper, we study the link between choices derived from monotonous set-dependent preferences and sequential rationalizability. This link is quite natural since choices derived from monotonous set-dependent preferences (introduced in [Houy, 2008b]) are characterized by a strong axiom of revealed preferences whereas sequentially rationalizable choice functions (introduced in [Manzini and Mariotti, 2007]) are characterized by a weak axiom of revealed preferences. |
| Keywords: | Weak/Strong axioms of revealed preferences, sequential rationalizability. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00360546_v1&r=upt |
| By: | André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | Certains domaines associés aux thèmes discutés ici échappent à mes compétences, comme par exemple l'évaluation des risques et des défauts de sûreté dans les transports. Ce qui m'a convaincu de l'importance de ce sujet, ce sont quelques conclusions très générales, je dirais volontiers quelques impressions que m'inspire depuis quelques années l'évolution très remarquable de nos pouvoirs d'analyse sur les processus de prise de décision en matière de risque. |
| Keywords: | risque, incertitude, terrorisme, utilité espérée, utilité non-espérée, OCDE |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00349469_v1&r=upt |