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on Utility Models and Prospect Theory |
| 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: | 2009–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14951&r=upt |
| By: | Jianying Qiu; Eva-Maria Steiger |
| Abstract: | Despite extensive studies, the nature of risk attitudes remains a vigorously discussed question in economics and psychology. In expected utility theory, attitudes towards risk originate from changes in marginal utility. Cumulative prospect theory (CPT) adds an additional dimension: the weighting of probabilities. By examining both dimensions, we strive to gain more insight on the relation between the curvature of utility function and probability weighting, and on possible relations to cognitive limitations. Our findings from a controlled laboratory experiment suggest that the two dimensions capture quite different characteristics. Though, most individuals exhibit concave utility and convex probability weighting, the two dimensions show no significant correlation. In addition, only probability weighting, not the curvature of utility function, is correlated with educational background and decision time, which suggests its relation to cognitive limitations. |
| Keywords: | Risk attitudes, cumulative prospect theory, experimental study |
| JEL: | C91 D81 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2009-11&r=upt |
| By: | Jianying Qiu |
| Abstract: | In this paper it is shown that the combination of mental accounting and loss aversion can fundamentally changes people's way of evaluating risky alternatives. The observation is applied in a market setting: Parimutuel betting markets. In parimutuel betting markets it has been found that for horses with lowest odds (favorites), market estimates of winning probabilities are smaller than objective winning probabilities; for horses with highest odds (longshot) the opposite is observed (the favorite-longshot bias). I build a game theoretical model and show that the favorite-longshot bias is the equilibrium play of the players with loss aversion, and that the degree of the favorite-longshot bias depends on the mental accounting process the players use. |
| Keywords: | loss aversion, mental accounting, parimutuel betting, the favorite-longshot bias. |
| JEL: | C72 D40 D81 G10 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2009-15&r=upt |
| By: | Aitor Calo (Universidad de Alicante) |
| Abstract: | We analyze a society that cares about inequality of opportunity. We propose adynamic setting in which effort is a decision variable that individuals adopt as asolution of an explicit utility maximization program. Effort determines themonetary outcome and it depends on the individual¿s preferences andcircumstances. The planner designs an incentive scheme so as to foster higherincomes, reducing the opportunity cost of effort and productivity for the lessfavoured agents. Income is assumed to be random, and contrary to the generalneutral assumption, we obtain that luck does have a biased and persistent effect onincome distribution that may be regarded as unfair. We also study the planner¿soptimal policy when she cannot infer perfectly the individuals¿ responsibilityfeature. |
| Keywords: | Equality of opportunity, effort decision, policy design, luck |
| JEL: | D31 D63 D82 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-12&r=upt |
| By: | Owari, Keita |
| Abstract: | We discuss the problem of exponential hedging in the presence of model uncertainty expressed by a set of probability measures. This is a robust utility maximization problem with a contingent claim. We first consider the dual problem which is the minimization of penalized relative entropy over a product set of probability measures, showing the existence and variational characterizations of the solution. These results are applied to the primal problem. Then we consider the robust version of exponential utility indifference valuation, giving the representation of indifference price using a duality result. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2008-09&r=upt |
| By: | Heifetz, Aviad; Meier, Martin; Schipper, Burkhard C |
| Abstract: | We define generalized extensive-form games which allow for mutual unawareness of actions. We extend Pearce's (1984) notion of extensive-form (correlated) rationalizability to this setting, explore its properties and prove existence. We define also a new variant of this solution concept, prudent rationalizability, which refines the set of outcomes induced by extensive-form rationalizable strategies. Finally, we define the normal form of a generalized extensive-form game, and characterize in it extensive-form rationalizability by iterative conditional dominance. |
| Keywords: | Unawareness; extensive-form games; extensive-form rationalizability; prudent rationalizability; iterative conditional dominance |
| JEL: | C70 D82 D80 C72 |
| Date: | 2009–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15058&r=upt |
| By: | Tobias Bruenner; Rene Levinský; Jianying Qiu |
| Abstract: | In this paper we experimentally test skewness preferences at the individual level. Several prospects that can be ordered with respect to the third-degree stochastic dominance (3SD) criterion are ranked by the participants of the experiment. We find that the skewness of a distribution has a significant impact on the decisions. Yet, while skewness has an impact, its direction differs substantially across subjects: 39% of our subjects act in accordance with skewness seeking and 10% seem to avoid skewness. On the level of individual decisions we find that the variance of the prospects and subjects' experience increases the probability of choosing the lottery with greater skewness. |
| Keywords: | Skewness, Stochastic dominance, Decision-making under uncertainty |
| JEL: | D81 C91 G11 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2009-13&r=upt |
| By: | Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and bond yields as well as risk premia are affine functions of the state variables: the dividend yield, two factors driving the one-period real interest rate and the rate of inflation. The model provides for each month the `term structure of equity premia', i.e. expected excess stock returns over various investment horizons. Model-implied equity premia decrease during the `dot-com' boom period, show an upward correction thereafter, and reach highest levels during the financial turmoil that started with the 2007 subprime crisis. Equity premia for longer-term investment horizons are less volatile than their short-term counterparts. JEL Classification: E43, G12. |
| Keywords: | Equity premium, affine term structure models, asset pricing. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901045&r=upt |