|
on Utility Models and Prospect Theory |
| By: | Christian Belzil (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE); Marco Leonardi (Università degli studi di Milano - Università di Milano - Università degli studi di Milano) |
| Abstract: | Using unique Italian panel data in which individual differences in attitudes toward risk are measurable (from a lottery pricing question), we investigate the effect of the individual specific time invariant risk aversion factor on the probability of entering higher education. Apart from the risk aversion factor, absolute risk aversion depends on various state variables (wealth, liquidity constraints, back- ground risk) and is assumed to be measured with nonclassical error. We also take into account the endogeneity of the response to the risk aversion question, as well as potential non-classical measurement error in wealth. All model specifications point out to the fact that individual specific risk aversion acts as a deterrent to higher education investment. |
| Keywords: | Risk Aversion, Ex-ante risk, schooling, subjective beliefs, dynamic discrete choices |
| Date: | 2009–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00411099_v1&r=upt |
| By: | Sushil Bikhchandani (UCLA); Uzi Segal (Boston College) |
| Abstract: | Preferences may arise from regret, i.e., from comparisons with alternatives forgone by the decision maker. We ask whether regret-based behavior is consistent with non-expected utility theories of transitive choice. We show that the answer is no. If choices are governed by ex ante regret and elation then non-expected utility preferences must be intransitive. |
| Keywords: | transitivity, regret |
| Date: | 2009–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:711&r=upt |
| By: | Walker, Todd; Haley, M. Ryan; McGee, M. Kevin |
| Abstract: | We demonstrate that shortfall-minimizing portfolio selection based on the Cressie- Read family of divergence measures maps to the HARA family. This means that all HARA utility functions can be interpreted as “endogenous” in the sense described in Stutzer (2003), and that traditional HARA expected utility maximization has an analog to the behavioral notion that an investor seeks to organize their selection of assets to minimize the probability of realizing a return below some pre-determined target or benchmark rate. We show that not only do risk aversion parameters arise endogenously, given the choice set, but that the type of risk aversion, relative or constant, is also determined endogenously. We also connect this approach to portfolio selection to some topics in behavioral economics. |
| Keywords: | Entropy; Measure Change; Cressie-Read; Endogenous Utility; Benchmark |
| JEL: | G11 |
| Date: | 2009–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17139&r=upt |
| By: | Oleg Badunenko; Nataliya Barasinska; Dorothea Schäfer |
| Abstract: | This study questions the popular stereotype that women are more risk averse than men in their investment decisions. The analysis is based on micro-level data from large-scale surveys of private households in five European countries. We enrich the conventional approach to examination of gender differences by explicitly controlling for investors' self-perceived risk aversion. Our results confirm the gender stereotype only partially. We find that women are less likely to hold risky assets. However, female owners of risky assets allocate an equal or even a higher share of their wealth to these assets than men. Our findings suggest that especially in case of women, the declared attitude toward financial risks may be misleading as it does not necessarily reflect the actual willingness to bear risks. |
| Keywords: | gender, risk aversion, financial behavior |
| JEL: | G11 J16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin06020&r=upt |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | The average Market Risk Premium (MRP) used in 2008 by professors in the United States (6.3%) was higher than the one used by their colleagues in Europe (5.3%). We also report statistics for 18 countries: the average MRP used in 2008 ranges from 4.1% (Belgium) to 10.5% (India). The dispersion of the MRP used was high: the average MRP used by professors of the same institution range was 3.5% and that of the same country was 6.9%. The average MRP used in 2007 was 1.5% lower than the one used in 2000. 15% of the professors decreased their MRP in 2008 (1.5% on average) and 24% increased it (2% on average). 66% of the professors used a lower MRP in 2007 than in 2000 (22% used a higher one). Most surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references that professors use to justify their MRP, and comments from 180 professors that illustrate the various interpretations of what is the required MRP and explain the confusion of students and practitioners about its concept and magnitude. |
| Keywords: | equity premium puzzle; required equity premium; expected equity premium; historical equity premium; |
| JEL: | M21 |
| Date: | 2009–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0796&r=upt |
| By: | Ingolf Dittmann (Erasmus University Rotterdam); Ko-Chia Yu (Erasmus University Rotterdam) |
| Abstract: | This paper investigates whether observed executive compensation contracts are designed to provide risk-taking incentives in addition to effort incentives. We develop a stylized principal-agent model that captures the interdependence between firm risk and managerial incentives. We calibrate the model to individual CEO data and show that it can explain observed compensation practice surprisingly well. In particular, it justifies large option holdings and high base salaries. Our analysis suggests that options should be issued in the money. If tax effects are taken into account, the model is consistent with the almost uniform use of at-the-money stock options. We conclude that the provision of risk-taking incentives is a major objective in executive compensation practice. |
| Keywords: | Stock Options; Executive Compensation; Effort Aversion; Risk-Taking Incentives; Optimal Strike Price |
| JEL: | G30 M52 |
| Date: | 2009–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090076&r=upt |
| By: | Meroz, Yael; Morone, Andrea; Morone, Piergiuseppe |
| Abstract: | In this paper we aim to look into the attributes of Ghanaians’ willingness-to-pay for green products. This would help us to assess whether Ghanaians show a preference towards environmental goods. The methodology employed to address these issues is an ‘experimentally-adapted’ CV survey which involves laboratory experiment conducted among Ghanaian University students. Notwithstanding the limitations arising from the sample used in our experiment (most notably University students do not represent, economically wise, the entire Ghanaian population), we believe that our investigation provides a first answer to such question as Ghanaians consistently show that they are willing to pay an extra premium for green products. |
| Keywords: | contingent valuation; experiment; incentive-compatible; Ghana; organic products; willingness to pay. |
| JEL: | O10 Q56 C91 |
| Date: | 2009–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17107&r=upt |
| By: | Eyal Winter; Ignacio Garcia-Jurado; Jose Mendez-Naya; Luciano Mendez-Naya |
| Abstract: | We introduce emotions into an equilibrium notion. In a mental equilibrium each player "selects" an emotional state which determines the player's preferences over the outcomes of the game. These preferences typically differ from the players' material preferences. The emotional states interact to play a Nash equilibrium and in addition each player's emotional state must be a best response (with respect to material preferences) to the emotional states of the others. We discuss the concept behind the definition of mental equilibrium and show that this behavioral equilibrium notion organizes quite well the results of some of the most popular experiments in the experimental economics literature. We shall demonstrate the role of mental equilibrium in incentive mechaisms and will discuss the concept of collective emotions, which is based on the idea that players can coordinate their emotional states. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp521&r=upt |
| By: | Maria Joana Girante (Universidade do Minho - NIPE); Barry K. Goodwin (North Carolina State University - Dept. Agricultural and Resource Economics, Raleigh, NC, U.S.A) |
| Abstract: | We use simulation methods in an expected utility maximization framework to analyze a farmer`s optimal resource allocation in the presence of government payments, decoupled and not. This framework is extended to incorporate the optimal choice of investment levels in the presence of credit constraints. Further extensions include a wealth-dependent interest rate and decreasing marginal yields. We find decoupled payments affect the optimal choices of the credit - constrained farmer though a collateral - enhancement effect, so they do distort production. The 2005 proposal by Senators Grasseley, Dorgan, Hagel, and Johnson to tighten limits on commodity payments is not found to affect payments of the typical Kansas farmer. |
| Keywords: | decoupled payments; credit constraints. |
| JEL: | Q17 Q18 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:14/2009&r=upt |