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on Utility Models and Prospect Theory |
| By: | Pivato, Marcus |
| Abstract: | Some social choice models assume that precise interpersonal comparisons of utility (either ordinal or cardinal) are possible, allowing a rich theory of distributive justice. Other models assume that absolutely no interpersonal comparisons are possible, or even meaningful; hence all Pareto-efficient outcomes are equally socially desirable. We compromise between these two extremes, by developing a model of `approximate' interpersonal comparisons of well-being, in terms of an incomplete preorder on the space of psychophysical states. We then define and characterize `approximate' versions of the classical egalitarian and utilitarian social welfare orderings. We show that even very weak assumptions about interpersonal comparability can yield preorders on the space of social alternatives which, while incomplete, are far more complete than the Pareto preorder (e.g. they select relatively small subsets of the Pareto frontier as being `socially optimal'). Along the way, we give sufficient conditions for an incomplete preorder to be representable using a collection of utility functions. We also develop a variant of Harsanyi's Social Aggregation Theorem. |
| Keywords: | interpersonal comparisons of utility; interpersonal comparisons of well-being; social choice; social welfare; approximate egalitarian; approximate utilitarian; Suppes-Sen; utility representations of partial orders; utility representations of preorders |
| JEL: | D81 D63 D70 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17060&r=upt |
| By: | Christiane Ernst; Christian Thöni |
| Abstract: | We report results from experimental first-price, sealed-bid, all-pay auctions for a good with a common and known value. We observe bidding strategies in groups of two and three bidders and under two extreme information conditions. As predicted by the Nash equilibrium, subjects use mixed strategies. In contrast to the prediction under standard assumptions bids are drawn from a bimodal distribution: very high and very low bids are much more frequent than intermediate bids. Standard risk preferences cannot account for our results. However, bidding behavior is consistent with the predictions of a model with reference dependent preferences as proposed by the prospect theory. |
| Keywords: | All-pay Auction; Prospect Theory, Experiment |
| JEL: | D44 D72 D80 C91 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2009:2009-25&r=upt |
| By: | Fioretti, Guido |
| Abstract: | A novel decision theory is emerging out of sparse findings in economics, mathematics and, most importantly, psychology and computational cognitive science. It rejects a fundamental assumption of the theory of rational decision-making, namely, that uncertain belief rests on independent assessment of utility and probability, and includes envisioning possibilities within its scope. Several researchers working with these premises, independently of one another, arrived at the conclusion that decision is made by highlighting the positive features of the alternative that will be chosen while opposing it to a loosing alternative, whose unpleasant aspects have been stressed. This article frames together contributions from different disciplines, often unknown to one another, with the hope of improving the coordination of research efforts. Furthermore, it discusses the status of the novel theory with respect to our current idea of rationality. |
| Keywords: | Rationality; Shackle; Shafer; Search for Dominant Structure; Differentiation -- Consolidation; Constraint Satisfaction Networks; Construction of Narratives. |
| JEL: | D89 D80 |
| Date: | 2009–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12897&r=upt |
| By: | Elisabeth Gugl (Department of Economics, University of Victoria); Justin Leroux (HEC Montéral and CIRPÉE) |
| Abstract: | We consider an n-person economy in which efficiency is independent of distribution but the cardinal properties of the agents’ utility functions preclude transferable utility (a property we call “Almost TU”). We show that Almost TU is a necessary and sufficient condition for all agents to either benefit jointly or suffer jointly with any change in production possibilities under well-behaved generalized utilitarian bargaining solutions (of which the Nash Bargaining and the utilitarian solutions are special cases). We apply the result to household decision-making in the context of the Rotten Kid Theorem and in evaluating a change in family taxation. |
| Keywords: | Axiomatic bargaining, Solidarity, Transferable utility, Family taxation, Rotten Kid Theorem |
| JEL: | C71 D13 D63 |
| Date: | 2009–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:0903&r=upt |
| By: | José Luiz Barros Fernandes; Juan Ignacio Peña; Benjamin Miranda Tabak |
| Abstract: | The objective of this paper is twofold. The first is to incorporate mental accounting, loss-aversion, asymmetric risk-taking behavior, and probability weighting in a multi-period portfolio optimization for individual investors. While these behavioral biases have previously been identified in the literature, their overall impact during the determination of optimal asset allocation in a multi-period analysis is still missing. The second objective is to account for the estimation risk in the analysis. Considering 26 daily index stock data over the period from 1995 to 2007, we empirically evaluate our model (BRATE – Behavior Resample Adjusted Technique) against the traditional Markowitz model. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:184&r=upt |
| By: | Uhlenbrock, Birgit |
| Abstract: | Assessments of investors' risk appetite/aversion stance via indicators often yields results which seem unsatisfactory (see e.g. Illing and Aaron (2005)). Understanding how such indicators work therefore seems essential for further improvements. The present paper seeks to contribute to this evolution, focusing on the Global Risk Appetite Index (GRAI) class of indicators going back to Kumar and Persaud (2002). Looking at international stock indices during the subprime crisis in 2007, the plausibility of the GRAIs benefits from applying the rank correlation approach of Kumar and Persaud (2002) combined with a modified version of the factor-transformation extension proposed by Misina (2006). |
| Keywords: | Risk appetite indicators,risk aversion indicators,asset pricing,financial markets. |
| JEL: | G11 G12 G15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:200908&r=upt |
| By: | Akihiko Takahashi (Faculty of Economics, University of Tokyo); Yukihiro Tsuzuki (Mizuho-DL Financial Technology Co., Ltd.); Akira Yamazaki (Graduate School of Economics, University of Tokyo and Mizuho-DL Financial Technology Co., Ltd.) |
| Abstract: | This paper proposes a new hedging scheme of European derivatives under uncertain volatility environments, in which a weighted variance swap called the polynomial variance swap is added to the Black-Scholes delta hedging for managing exposure to volatility risk. In general, under these environments one cannot hedge the derivatives completely by using dynamic trading of only an underlying asset owing to volatility risk. Then, for hedging uncertain volatility risk, we design the polynomial variance, which can be dependent on the level of the underlying asset price. It is shown that the polynomial variance swap is not perfect, but more efficient as a hedging tool for the volatility exposure than the standard variance swap. In addition, our hedging scheme has a preferable property that any information on the volatility process of the underlying asset price is unnecessary. To demonstrate robustness of our scheme, we implement Monte Carlo simulation tests with three different settings, and compare the hedging performance of our scheme with that of standard dynamic hedging schemes such as the minimum-variance hedging. As a result, it is found that our scheme outperforms the others in all test cases. Moreover, it is noteworthy that the scheme proposed in this paper continues to be robust against model risks. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf653&r=upt |