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on Utility Models and Prospect Theory |
| By: | Sudhir A. Shah |
| Abstract: | The Author considera a decision-making environment with an outcome space that is a convex and compact subset of a vector space belonging to a general class of such spaces. Given this outcome space,he defines general classes of (a) risk averse von Neumann-Morgenstern utility functions defined over the outcome space, (b) multi-valued mappings that yield the certainty equivalent outcomes corresponding to a lottery, (c) multi-valued mappings that yield the risk premia corresponding to a lottery, and (d) multi-valued mappings that yield the acceptance set of lotteries corresponding to an outcome. Their duality results establish that the usual mappings that generate (b), (c) and (d) from (a) are bijective.They apply these results to the problem of computing the value of financial assets to a risk averse decision-maker and show that this value will always be less than the arbitrage-free valuation.[CDS WP NO 160] |
| Keywords: | Risk aversion; vector outcomes; certainty equivalence;risk premia; acceptance set |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2085&r=upt |
| By: | Hoel, Michael (Department of Economics) |
| Abstract: | The criterion of cost-effectiveness in health management may be given a welfaretheoretical justification if people are risk neutral with respect to life years. With risk aversion, the optimal allocation of health expenditures change: Compared to the costeffective allocation, more resources should be allocated to health cases for which the expected outcomes even after treatment are worse than average. The consequences of medical interventions are usually not known with certainty. Given this type of uncertainty, simple application of cost-effectiveness analysis would recommend maximization of expected health benefits given the health budget. We show that when people are risk averse with respect to the number of life years they live, the uncertainty associated with different types of interventions should play a role on allocating the health budget. |
| Keywords: | Health management; risk aversion; QALY; HYE |
| JEL: | D61 D81 H43 H51 I18 |
| Date: | 2009–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oslohe:2001_010&r=upt |
| By: | Nguyen, Quang |
| Abstract: | We combine an artefactual field experiments and household survey data to investigate whether involvement in a unique occupation such as fishery makes the fishermen exhibit different risk and time preferences than those in other occupations. Using a structural model approach, we integrate prospect theory and hyperbolic time discounting into a single framework to simultaneously estimate and correlate the parameters of both risk and time preferences with other demographic variables. The key finding is that fishermen are found to be less risk-averse and more patient than others. |
| Keywords: | Experimental Economics; Prospect Theory; Hyperbolic Discounting; Risk Behavior; Vietnam fishermen |
| JEL: | D81 C93 Q22 |
| Date: | 2009–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16012&r=upt |
| By: | Jeremy T. Fox; Amit Gandhi |
| Abstract: | We show how to nonparametrically identify the distribution that characterizes heterogeneity among agents in a general class of structural choice models. We introduce an axiom that we term separability and prove that separability of a structural model ensures identification. The main strength of separability is that it makes verifying the identification of nonadditive models a tractable task because it is a condition that is stated directly in terms of the choice behavior of agents in the model. We use separability to prove several new results. We prove the identification of the distribution of random functions and marginal effects in a nonadditive regression model. We also identify the distribution of utility functions in the multinomial choice model. Finally, we extend 2SLS to have random functions in both the first and second stages. This instrumental variables strategy applies equally to multinomial choice models with endogeneity. |
| JEL: | C14 C25 L0 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15147&r=upt |
| By: | Schuster, Stephan |
| Abstract: | Non-classical models of economic behaviour, usually summarised under the notion of 'Bounded Rationality' criticise the assumptions of the standard economic model - hyperrationality, perfect and costless information, and unlimited mental processing capabilities. However, alternative approaches have either remained very simple or purely descriptive. Here, a computational approach is presented based on Simon's concept of bounded rationality and satisficing as a compromise between the oversimplification of analytical and the descriptiveness of rich cognitive models. |
| Keywords: | agent based modelling; bounded rationality; reinforcement learning; rule extraction |
| JEL: | C63 D83 |
| Date: | 2009–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15942&r=upt |
| By: | Angel Bujosa Bestard (Centre de Recerca Econòmica (UIB · Sa Nostra)); Antoni Riera Font (Centre de Recerca Econòmica (UIB · Sa Nostra)); Robert L. Hicks (The College of William and Mary) |
| Abstract: | This paper investigates heterogeneity in preferences for forest recreators in Mallorca, Spain. We develop a latent class approach combining discrete and continuous representations of tastes and compare it with the conventional latent class and random parameter logit approaches. We investigate the performance of the discrete-continuous model by comparing welfare estimates and predictive accuracy. The discrete-continuous model outperforms latent class and mixed logit approaches when comparing goodness-of-fit and in- sample site-choice forecasts. We find that the discrete-continuous model for preference heterogeneity reveals variation among individuals' preferences and WTP, and for some policy changes our results reveal striking differences in means and distributions of WTP. |
| Keywords: | Travel Cost Method, latent class model, random parameter model, recreation demand, forests |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pdm:wpaper:2009/2&r=upt |
| By: | Katherine L. Milkman (The University of Pennsylvania); Mary Carol Mazza (Harvard Business School, Negotiation, Organizations and Markets Unit); Lisa L. Shu (Harvard Business School, Organizational Behavior Unit); Chia-Jung Tsay (Harvard Business School, Negotiation, Organizations and Markets Unit); Max H. Bazerman (Harvard Business School, Negotiation, Organizations and Markets Unit) |
| Abstract: | Policies that would create net benefits for society but would also involve costs frequently lack the necessary support to be enacted because losses loom larger than gains psychologically. To reduce this harmful consequence of loss aversion, we propose a new type of policy bundling technique in which related bills that have both costs and benefits are combined. Using a laboratory study, we confirm across a set of four legislative domains that this bundling technique increases support for bills that have both costs and benefits. We also demonstrate that this effect is due to changes in the psychology of decision making, rather than voters' willingness to compromise and support a bill they weakly oppose when that bill is bundled with one they strongly support. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:09-147&r=upt |
| By: | Marie-Louise Leroux; Grégory Ponthière |
| Abstract: | Classical utilitarianism, if coupled with standard assumptions such as the expected utility hypothesis and additive lifetime welfare, has the undesirable corollary to recommend a redistribution of resources from short-lived to long-lived agents, against any intuition of compensation. This paper proposes a remedy to that undesirable property of utilitarianism. This remedy consists in imputing, when solving the social planner's problem, the consumption equivalent of a long life to the consumption of long-lived agents. Provided the consumption equivalent is positive, the modified first-best problem exhibits a compensation of short-lived agents, under the form of a higher consumption. Then, in a general framework where agents differ in survival prospects, we compare the ex ante remedy (compensating agents with a lower life expectancy) and the ex post remedy (compensating short-lived agents), and show their incompatibility. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2009-19&r=upt |
| By: | Fry, J. M. |
| Abstract: | We develop a rational expectations model of financial bubbles and study ways in which a generic risk-return interplay is incorporated into prices. We retain the interpretation of the leading Johansen-Ledoit-Sornette model, namely, that the price must rise prior to a crash in order to compensate a representative investor for the level of risk. This is accompanied, in our stochastic model, by an illusion of certainty as described by a decreasing volatility function. The basic model is then extended to incorporate multivariate bubbles and contagion, non-Gaussian models and models based on stochastic volatility. Only in a stochastic volatility model where the mean of the log-returns is fixed does volatility increase prior to a crash. |
| Keywords: | financial crashes; super-exponential growth; illusion of certainty; contagion |
| JEL: | C00 E30 G10 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16027&r=upt |
| By: | Denis Boissin (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis) |
| Abstract: | Modern environmental issues imply that decision-makers take into account possibly conflicting information from distinct domains, such as science and economics. Boundary organizations, institutions that cross the gap between two different domains, are able to act beyond the boundaries while remaining accountable to each side. The goal is to simulate boundary organizations to assess their impact on the diffusion of experts' opinions. The hypothesis tested is whether the existence of a boundary organization eases the decision-making process by reducing the number of opinions expressed. The methodology relies on a multi-agent system based on a model of continuous opinion dynamics extended over two dimensions. Agents are described by credibility and conviction: the credibility represents how much other agents may be influenced by an agent, and the conviction represents the resistance of an agent to changing its position. Two kinds of agents are left free to interact, modifying their position through one-to-one exchanges. Agents called borgs are introduced: open to trans-disciplinary discussion, they are able to exchange on both dimensions. The results show that the range of expressed opinions is significantly reduced, even at low levels of experts involved in the boundary organization. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00399565_v1&r=upt |
| By: | Pavlo R. Blavatskyy; Wolfgang R. Köhler |
| Abstract: | This paper investigates how subjects determine minimum selling prices for lotteries. We design an experiment where subjects have at every moment an incentive to state their minimum selling price and to adjust the price if they believe that the price that they stated initially was not optimal. We observe frequent and sizeable price adjustments. We find that random pricing models can not explain the observed price patterns. We show that earlier prices contain information about future price adjustments. We propose a model of Stochastic Pricing that offers an intuitive explanation for these price adjustment patterns. |
| Keywords: | Time pressure, certainty equivalent, experiment, stochastic, Becker-DeGroot- Marschak (BDM) method |
| JEL: | C91 D81 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:422&r=upt |
| By: | Michael Schwarz; Sergei Severinov |
| Abstract: | In this paper we study "investment tournaments," a class of decision problems that involve gradual allocation of investment among several alternatives whose values are subject to exogenous shocks. The decision-maker's payoff is determined by the final values of the alternatives. An important example of career tournaments motivating our research is the career choice problem, since a person choosing a career often starts by investing in learning several professions. We show that in a broad range of cases it is optimal for the decision-maker in each time period to allocate all resources to the most promising alternative. We also show that in tournaments for a promotion the agents would rationally put forth a higher effort in an early stage of the tournament in a bid to capture a larger share of employer's investment, such as mentoring. |
| JEL: | J24 J41 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15136&r=upt |