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on Utility Models and Prospect Theory |
| By: | Michèle Cohen (Paris School of Economics - Centre d'Economie de la Sorbonne) |
| Abstract: | The classical expected utility model of decision under risk (von Neumann-Morgenstern, 1944) has been criticized from an experimental point of view (Allais' paradox) as well as for its restrictive lack of explanatory power. The Rank-Dependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions : a utility function on consequences measuring preferences over sure outcomes and a probability weighting function measuring the subjective weighting of probabilities. As we show and illustrate in this paper, this model allows for more diversified types of behavior : it is consistent with the behavior revealed by the Allais paradox ; the decision maker could dislike risk (prefer to any lottery its expectation) without necessarily avoiding any increase in risk ; diminishing marginal utility may coexists with "weak" risk seeking attitudes ; decision makers with the same utility function may differ in their choices between lotteries when they have different probability weighting functions ; furthemore, the same decision maker may have different, context-dependent, subjective beliefs on events. |
| Keywords: | Decision under risk, risk perception, risk aversion, Allais paradox, Rank-Dependent Expected Utility model. |
| JEL: | D81 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v08084&r=upt |
| By: | Alain Chateauneuf (Paris School of Economics - Centre d'Economie de la Sorbonne); Michèle Cohen (Paris School of Economics - Centre d'Economie de la Sorbonne); Jean-Yves Jaffray (Laboratoire d'Informatique de Paris VI) |
| Abstract: | This chapiter of a collective book is dedicated to classical decision models under uncertainty, i.e. under situations where events do not have "objective" probabilities with which the Decision Marker agrees. We present successively the two main theories, their axiomatic, the interpretation and the justification of their axioms and their main properties : first, the general model of Subjective Expected Utility due to Savage (Savage, 1954), second, the Anscombe-Aumann (1963) theory, in a different framework. Both theories enforce the universal use of a probabilistic representation. We then discuss this issue in connection with the experimental result known as the Ellsberg paradox. |
| Keywords: | Uncertainty, subjective probability, subjective Expected Utility, savage, Anscombe and Aumann, Ellsberg paradox. |
| JEL: | D81 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v08086&r=upt |
| By: | Alain Chateauneuf (Paris School of Economics - Centre d'Economie de la Sorbonne); Michèle Cohen (Paris School of Economics - Centre d'Economie de la Sorbonne) |
| Abstract: | This chapter of a collective book aims at presenting cardinal extensions of the EU model, based on the Choquet integral, which allow to take into account observed behaviors as in Allais' paradox under risk or Ellsberg's paradox under uncertainty, where the expected utility model is violated. Under a key axiom, the comonotonic independence axiom, Schmeidler under uncertainty, and Quiggin and Yaari under risk, succeeded to characterize preferences which generalize the EU model, by means of a functional that turned out to be a Choquet integral. These models not only explain most of the observed paradoxes but also allow for more diversified patterns of behavior under uncertainty as well under risk. |
| Keywords: | Uncertainty, risk, comonotony, Choquet capacity, Choquet integral. |
| JEL: | D81 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v08087&r=upt |
| By: | Langlais, Eric |
| Abstract: | This papers studies three questions. What do we know about criminals 'preferences ? How should we represent such preferences ? What are the consequences for law enforcement policies ? |
| Keywords: | aversion au risque; sanctions monétaires et non monétaires; préférences State-Dependent; économie de la criminalité; dissuasion |
| JEL: | D81 K42 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14892&r=upt |
| By: | Martin Jones (University of Dundee) |
| Abstract: | Keynes's theory of probability has been studied intensively in the past few years with much discussion of its relevance to modern economics. This paper examines Keynes's ideas in light of criticisms made by other authors and comes to the conclusion that Keynes's views on rationality are critically flawed. However, it is asserted that this actually allows more freedom for investigation when it is combined with insights from behavioural economics and gives examples where this could be fruitful. One of the side-effects of this is that there is a narrowing of the gap between Keynesian and mainstream behavioural views on decision-making. |
| Keywords: | uncertainty, Keynes, behavioral economics |
| JEL: | B41 |
| URL: | http://d.repec.org/n?u=RePEc:sti:wpaper:031/2009&r=upt |
| By: | Mário Gómez |
| Abstract: | In this paper we will discuss the relation between the rationality of the agents, and the probability context that involves them in the decision process made by Keynes but considering categories such as expectation as language game, in the sense that Roger Koppl understand it as-if rationalizations. In this sense Keynes’s expectations can be understand and see as only a very particular category: cognitive expectation and the uncertain situation as a very specific circumstance in production process. If expectation theory is one of the crucial issues in economic theory, a language game theory of expectation provide a more general case that need to be re-examinate as a stimulating approach |
| Keywords: | history of the economic ideas in Latin America, economic theory, expectations, theory of expectations. |
| JEL: | B5 O3 O4 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp142009&r=upt |
| By: | Ivan Soraperra (University of Trento) |
| Abstract: | This paper develops a model of choice that embeds some psychological aspects affecting decision maker's behaviour. In the model, the decision maker attaches an unobservable psychological index -representing, e.g., the level of perceived availability or the level of salience- to each alternative in a universal collection. Choice behaviour of the decision maker is then conditioned by the indexes attached to the alternatives. With this paper we show that, if the conditional choice behaviour satisfies two intuitively appealing properties -namely Monotonicity and Conditional IIA- then the observable part of the choice behaviour, i.e., the unconditional choices, can be interpreted as the product of the maximization of a preference relation. The paper discusses also some welfare consideration regarding the choice model and finally some interpretations of the indexes are provided. |
| Keywords: | Revealed preferences, Choice with frame, Salience, Scarcity bias, Bandwagon effect, Snob effect |
| JEL: | D11 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp643&r=upt |
| By: | Bosi, Gianni; Caterino, Alessandro; Ceppitelli, Rita |
| Abstract: | We present new sufficient conditions for the existence of a continuous utility function for an arbitrary binary relation on a topological space. Such conditions are basically obtained by using both the concept of a weakly continuous binary relation on a topological space and the concept of a countable network weight. In particular, we are concerned with suitable topological notions which generalize the concept of compactness and do not imply second countability or local compactness. |
| Keywords: | hereditarily Lindeloef space; weakly continuous binary relation; countable network weight; hemicompactness; submetrizability. |
| JEL: | C60 |
| Date: | 2009–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14808&r=upt |