
on Utility Models and Prospect Theory 
By:  L’Haridon, Olivier; Placido, Lætitia 
Abstract:  In a recent paper, Machina (2008) suggested choice problems in the spirit of Ellsberg (1961) which challenge tailseparability, an implication of Choquet Expected Utility (CEU) to a similar extent as the Ellsberg paradox challenged the surething principle implied by Subjective Expected Utility (SEU). We have tested choice behavior for bets on one of Machina’s choice problems, the reflection example. Our results indicate that tailseparability is violated by a large majority of subjects (over 70% of the sample). These empirical findings complement the theoretical analysis of Machina (2008) and, together, they confirm the need for new approaches in the analysis of ambiguity for decision making. 
Keywords:  ambiguity; Choquet expected utility; experimental economics 
JEL:  C90 D81 
Date:  2008–10–01 
URL:  http://d.repec.org/n?u=RePEc:ebg:heccah:0909&r=upt 
By:  Richard M. H. Suen (Department of Economics, University of California Riverside) 
Abstract:  The constantrelativeriskaversion (CRRA) utility function is now predominantly used in quantitative macroeconomic studies. This function, however, is not bounded and thus creates problems when applying the standard tools of dynamic programming. This paper devises a method for "bounding" the CRRA utility functions. The proposed method is based on a set of conditions that can establish boundedness among a broad class of utility functions. These results are then used to construct a bounded utility function that is identical to a CRRA utility function except when consumption is very small or very large. It is shown that the constructed utility function also satisfies the Inada condition and is consistent with balanced growth. 
Keywords:  Utility Function; Elasticity of Marginal Utility; Boundedness 
JEL:  C61 O41 
Date:  2009–02 
URL:  http://d.repec.org/n?u=RePEc:ucr:wpaper:200902&r=upt 
By:  Michèle Cohen (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I, EEPPSE  Ecole d'Économie de Paris  Paris School of Economics  Ecole d'Économie de Paris); JeanMarc Tallon (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I, EEPPSE  Ecole d'Économie de Paris  Paris School of Economics  Ecole d'Économie de Paris); JeanChristophe Vergnaud (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I) 
Abstract:  We report in this paper the result of three experiments on risk, ambiguity and time attitude. The first two differed by the population considered (students vs general population) while the third one used a different protocol and concerned students and portfolio managers. We find quite a lot of heterogeneity at the individual level. Of principal interest was the elicitation of risk, time and ambiguity attitudes and the relationship among these (model free) measures. We find that on the student population, there is essentially no correlation. A non negligible fraction of the population behaves in an extremely cautions manner in the risk and ambiguity domain. When we drop this population from the sample, the correlation between our measures is also non significant. We also raise three questions linked to measurement of ambiguity attitudes that come out from our data sets. 
Keywords:  Experiments, risk aversion, impatience, imprecision aversion. 
Date:  2009–03 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:halshs00389674_v1&r=upt 
By:  Robert Kast; André Lapied; Pascal Toquebeuf 
Keywords:  Conditional Choquet expectation; Conditional capacity; Updating rules; Choquet Expected Utility; Dynamic consistency; Consequentialism. 
JEL:  D81 D83 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:icr:wpmath:042008&r=upt 
By:  Paraschiv, Corina; L’Haridon, Olivier 
Abstract:  Les notions de point de référence et d’aversion aux pertes sont deux éléments essentiels de la prospect theory, qui constitue à ce jour la théorie la plus reconnue concernant la représentation de la prise de décision individuelle dans le risque. L’objectif de cet article est de montrer comment ces notions peuvent être utilisées par les gestionnaires pour améliorer leur compréhension du comportement des managers et des consommateurs. Trois contextes de décision sont étudiés à savoir les marchés financiers, les échanges commerciaux et la politique de fixation du prix. Dans chaque contexte, des pistes de réflexion pour la recherche future sont proposées. 
Keywords:  Prospect theory; Point de référence; Aversion aux pertes; Comportement du consommateur; Finance comportementale; Marketing 
JEL:  D81 
Date:  2009–06–03 
URL:  http://d.repec.org/n?u=RePEc:ebg:heccah:0908&r=upt 
By:  Michael Mania; Revaz Tevzadze 
Abstract:  We study utility maximization problem for general utility functions using dynamic programming approach. We consider an incomplete financial market model, where the dynamics of asset prices are described by an Rdvalued continuous semimartingale. Under some regularity assumptions we derive backward stochastic partial differential equation (BSPDE) related directly to the primal problem and show that the strategy is optimal if and only if the corresponding wealth process satisfies a certain forwardSDE. As examples the cases of power, exponential and logarithmic utilities are considered 
Keywords:  Backward stochastic partial dierential equation, utility maximization problem, semimartingale, incomplete markets 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:icr:wpmath:072008&r=upt 
By:  Heldmann, Marcus (OttovonGuericke University Magdeburg); Vogt, Bodo (Faculty of Economics and Management, OttovonGuericke University Magdeburg); Heinze, HansJochen (OttovonGuericke University Magdeburg); Münte, Thomas (OttovonGuericke University Magdeburg) 
Abstract:  Although the concept of utility is fundamental to many economic theories, up to now a generally accepted method determining a subject’s utility function is not available. We investigated two methods that are used in economic sciences for describing utility functions by using responselocked eventrelated potentials in order to assess their neural underpinnings. For defining the certainty equivalent (CE), we used a lottery game with probabilities of 0.5, for identifying the subjects’ utility functions directly a standard bisection task was applied. Although the lottery tasks’ payoffs were only hypothetical, a pronounced negativity was observed resembling the error related negativity (ERN) previously described in action monitoring research, but this occurred only for choices far away from the indifference point between money and lottery. By contrast, the bisection task failed to evoke an ERN irrespective of the responses’ correctness. Based on these findings we are reasoning that only decisions made in the lottery task achieved a level of subjective relevance that activates cognitiveemotional monitoring. In terms of economic sciences, our findings support the view that the bisection method is unaffected by any kind of probability valuation or other parameters related to risk and in combination with the lottery task can, therefore, be used to differentiate between payoff and probability valuation. 
Keywords:  Utility function; neuroeconomics; errorrelated negativity; executive functions; cognitive electrophysiology; lottery,bisection 
Date:  2009–05 
URL:  http://d.repec.org/n?u=RePEc:mag:wpaper:09014&r=upt 
By:  BISIÈRE, Christophe; DÉCAMPS, JeanPaul; LOVO, Stefano 
JEL:  G14 D82 
Date:  2009–05 
URL:  http://d.repec.org/n?u=RePEc:ide:wpaper:20671&r=upt 
By:  Nhat Le (Nhat Le, Ph.D, lecturer at Faculty of Economics, Vietnam National University, HCM city, Vietnam) 
Abstract:  The ARCH model shares with the related literature on risk and return one common thing: the rationalexpectation paradigm. In particularly, market prices should reflect investors' rational forecasts, based on the best available information. When new information arrives, the market's expectations change. Therefore, prices fluctuate. Thus, price volatility is due to information arrivals and hence, volatility can be forecast, based on the uptodate information. However, when the available information is too complex, the rational expectation may no longer hold. Bounded rationality should be added into our frame work to study risk and return, so that, we can gain a better understanding of market volatility. 
Keywords:  Bounded rationality, Market's expectations, Volatility. 
JEL:  C22 C53 
Date:  2009–03 
URL:  http://d.repec.org/n?u=RePEc:dpc:wpaper:1109&r=upt 
By:  Meier, Stephan (Columbia University); Sprenger, Charles (University of California, San Diego) 
Abstract:  Some individuals borrow extensively on their credit cards. This paper tests whether presentbiased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that presentbiased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other sociodemographics, and credit constraints. 
Keywords:  time preferences, dynamic inconsistency, credit card borrowing, field experiment 
JEL:  D12 D14 D91 C93 
Date:  2009–05 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp4198&r=upt 
By:  Bernard De Meyer (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I); Ehud Lehrer (School of Mathematical Sciences  Tel Aviv University); Dinah Rosenberg (LAGA  Laboratoire d'Analyse, Géométrie et Applications  CNRS : UMR7539  Université ParisNord  Paris XIII) 
Abstract:  In a Bayesian game some players might receive a noisy signal regarding the specific game actually being played before it starts. We study zerosum games where each player receives a partial information about his own type and no information about that of the other player and analyze the impact the signals have on the payoffs. It turns out that the functions that evaluate the value of information share two property. The first is Blackwell monotonicity, which means that each player gains from knowing more. The second is concavity on the space of conditional probabilities. 
Keywords:  Value of information, Blackwell monotonicity, concavity. 
Date:  2009–05 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:halshs00390625_v1&r=upt 
By:  Michael Mania; Marina Santacroce 
Abstract:  We consider the exponential utility maximization problem under partial information. The underlying asset price process follows a continuous semimartingale and strategies have to be constructed when only part of the information in the market is available. We show that this problem is equivalent to a new exponential optimization problem, which is formulated in terms of observable processes. We prove that the value process of the reduced problem is the unique solution of a backward stochastic differential equation (BSDE), which characterizes the optimal strategy. We examine two particular cases of diffusion market models, for which an explicit solution has been provided. Finally, we study the issue of suffciency of partial information. 
Keywords:  Backward stochastic differential equation; semimartingale market model; exponential utility maximization problem; partial information; suffcient filtration. 
JEL:  C61 G11 
Date:  2008–06 
URL:  http://d.repec.org/n?u=RePEc:icr:wpmath:242008&r=upt 
By:  Tim Bollerslev (Department of Economics, Duke University, Durham and CREATES); Viktor Todorov (Department of Finance, Kellogg School of Management, Northwestern University) 
Abstract:  We show that the compensation for rare events accounts for a large fraction of the equity and variance risk premia in the S&P 500 market index. The probability of rare events vary significantly over time, increasing in periods of high market volatility, but the risk premium for tail events cannot solely be explained by the level of the volatil ity. Our empirical investigations are essentially modelfree. We estimate the expected values of the tails under the statistical probability measure from "medium" size jumps in highfrequency intraday prices and an extreme value theory approximation for the corresponding jump tail density. Our estimates for the riskneutral expectations are based on short maturity outofthe money options and new modelfree option implied variation measures explicitly designed to separate the tail probabilities. At a general level, our results suggest that any satisfactory equilibrium based asset pricing model must be able to generate large and timevarying compensations for fears of disasters. 
Keywords:  rare events, jumps, highfrequency data, options, fears, extreme value theory, equity risk premium, variance risk premium 
JEL:  C13 C14 G10 G12 
Date:  2009–06–11 
URL:  http://d.repec.org/n?u=RePEc:aah:create:200926&r=upt 
By:  John Bryant (Vocat International) 
Abstract:  Draft chapter from a forthcoming book entitled Thermoeconomics, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 covers historical research on the disciplines, the structural comparisons between of the ideal gas equation and the quantity theory. Chapter 2 concerns a general stock model that can be adapted to represent those of money, labour and economic output. Chapter 3 deals with economic representations of the first and second laws of thermodynamics, work done, internal value and entropic value, reversibility, entropy, particular economic processes and utility. Chapter 4 concerns a thermodynamic representation of production processes and reaction kinetics. Chapter 5 constructs a thermodynamic money system, using historical data of the UK and USA economies to provide empirical analysis. Particular aspects covered include elastic relationships, entropy, interest rates and yield. Chapter 6 describes aspect of labour and unemployment. Chapter 7 describes the principles of entropy and maximisation, the structure of economic cycles, efficiency criteria and measurement problems. Chapter 8 sets out analyses of world energy and climate change to illustrate empirically some of the principles covered by the book. 
Keywords:  Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, yield, rate, redemption 
JEL:  A1 C02 C68 D5 E O1 
Date:  2009–06 
URL:  http://d.repec.org/n?u=RePEc:voc:wpaper:tech52009&r=upt 
By:  John Bryant (Vocat International) 
Abstract:  Draft chapter from a forthcoming book entitled Thermoeconomics, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 covers historical research on the disciplines, the structural comparisons between of the ideal gas equation and the quantity theory. Chapter 2 concerns a general stock model that can be adapted to represent those of money, labour and economic output. Chapter 3 deals with economic representations of the first and second laws of thermodynamics, work done, internal value and entropic value, reversibility, entropy, particular economic processes and utility. Chapter 4 concerns a thermodynamic representation of production processes and reaction kinetics. Chapter 5 constructs a thermodynamic money system, using historical data of the UK and USA economies to provide empirical analysis. Particular aspects covered include elastic relationships, entropy, interest rates and yield. Chapter 6 describes aspect of labour and unemployment. Chapter 7 describes the principles of entropy and maximisation, the structure of economic cycles, efficiency criteria and measurement problems. Chapter 8 sets out analyses of world energy and climate change to illustrate empirically some of the principles covered by the book. 
Keywords:  Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest 
JEL:  A1 C02 C68 D5 E O1 
Date:  2009–06 
URL:  http://d.repec.org/n?u=RePEc:voc:wpaper:tech32009&r=upt 
By:  John Bryant (Vocat International) 
Abstract:  Draft chapter from a forthcoming book entitled Thermoeconomics, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 covers historical research on the disciplines, the structural comparisons between of the ideal gas equation and the quantity theory. Chapter 2 concerns a general stock model that can be adapted to represent those of money, labour and economic output. Chapter 3 deals with economic representations of the first and second laws of thermodynamics, work done, internal value and entropic value, reversibility, entropy, particular economic processes and utility. Chapter 4 concerns a thermodynamic representation of production processes and reaction kinetics. Chapter 5 constructs a thermodynamic money system, using historical data of the UK and USA economies to provide empirical analysis. Particular aspects covered include elastic relationships, entropy, interest rates and yield. Chapter 6 describes aspect of labour and unemployment. Chapter 7 describes the principles of entropy and maximisation, the structure of economic cycles, efficiency criteria and measurement problems. Chapter 8 sets out analyses of world energy and climate change to illustrate empirically some of the principles covered by the book. 
Keywords:  Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest 
JEL:  A1 C02 C68 D5 E O1 
Date:  2009–06 
URL:  http://d.repec.org/n?u=RePEc:voc:wpaper:tech12009&r=upt 
By:  John Bryant (Vocat International) 
Abstract:  Draft chapter from a forthcoming book entitled Thermoeconomics, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 covers historical research on the disciplines, the structural comparisons between of the ideal gas equation and the quantity theory. Chapter 2 concerns a general stock model that can be adapted to represent those of money, labour and economic output. Chapter 3 deals with economic representations of the first and second laws of thermodynamics, work done, internal value and entropic value, reversibility, entropy, particular economic processes and utility. Chapter 4 concerns a thermodynamic representation of production processes and reaction kinetics. Chapter 5 constructs a thermodynamic money system, using historical data of the UK and USA economies to provide empirical analysis. Particular aspects covered include elastic relationships, entropy, interest rates and yield. Chapter 6 describes aspect of labour and unemployment. Chapter 7 describes the principles of entropy and maximisation, the structure of economic cycles, efficiency criteria and measurement problems. Chapter 8 sets out analyses of world energy and climate change to illustrate empirically some of the principles covered by the book. 
Keywords:  Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest 
JEL:  A1 C02 C68 D5 E O1 
Date:  2009–06 
URL:  http://d.repec.org/n?u=RePEc:voc:wpaper:tech72009&r=upt 
By:  Santi Budria; Luis DiazSerrano; Ada FerreriCarbonell; Joop Hartog 
Abstract:  We replicate Shaw (1996) who found that individual wage growth is higher for individuals with greater preference for risk taking. Expanding her dataset with more American observations and data for Germany, Spain and Italy, we find mixed support for the earlier results. We present and estimate a new model and find that in particular the wage level is sensitive to attitudes towards risk taking. 
Keywords:  wage growth, risk, postschool investment 
JEL:  J24 J30 
Date:  2009 
URL:  http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp192&r=upt 
By:  Catalina M. Torres Figuerola (Centre de Recerca Econòmica (UIB · Sa Nostra)); Antoni Riera Font (Centre de Recerca Econòmica (UIB · Sa Nostra)) 
Abstract:  After doing a CE literature review to examine the dominant trends around the definition of environmental attributes in terms of their identification as external benefits or costs, their description through qualitative or quantitative attribute level labels, their number of levels and their assumed relationship with utility (i.e. linear vs nonlinear), three main conclusions have been drawn. First, definition of environmental attributes as external costs has been uncommon. Second, only one single parameter has been estimated for most of them, in which cases the number of quantitative and qualitative attributes has been similar. Third, nonlinear effects have been mainly depicted through use of qualitative attributes. In this context, this paper examines the policy relevance of defining the environmental attributes as external costs when the assessment of welfare losses induced by potential impacts from polluting activities is the issue. It shows how a costbased attribute definition allows identifying the environmental attributes through impact pathway analyses not only enabling links between welfare estimates and actual impact magnitudes but also promoting the description of attribute levels in quantitative terms. 
Keywords:  Choice experiments, environmental attributes, utility specification, external costs, impact pathway, eutrophication 
Date:  2009 
URL:  http://d.repec.org/n?u=RePEc:pdm:wpaper:2009/1&r=upt 