nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒10‒03
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Uncertainty aversion and equilibrium existence in games with incomplete information By Azrieli, Yaron; Teper, Roee
  2. Exercise Strategies for American Exotic Options under Ambiguity By Tatjana Chudjakow; Jörg Vorbrink
  3. How Certain Is the Uncertainty Effect? By Ondrej Rydval; Andreas Ortmann; Sasha Prokosheva; Ralph Hertwig
  4. When a risky prospect is valued more than its best possible outcome By Andreas C. Drichoutis; Rodolfo M. Nayga, Jr.; Jayson L. Lusk; Panagiotis Lazaridis
  5. Do risk attitudes differ within the group of entrepreneurs? By Block, Joern; Sandner, Philipp; Spiegel, Frank
  6. Debiasing EQ-5D Tariffs. New estimations of the spanish EQ-5D value set under nonexpected utility By Jose María Abellán Perpiñán; Fernando Ignacio Sánchez Martínez; Jorge Eduardo Martínez Pérez; Ildefonso Méndez Martínez
  7. Liberal Egalitarianism and the Harm Principle By Michele Lombardi; Roberto Veneziani

  1. By: Azrieli, Yaron; Teper, Roee
    Abstract: We consider games with incomplete information a la Harsanyi, where the payoff of a player depends on an unknown state of nature as well as on the profile of chosen actions. As opposed to the standard model, players' preferences over state--contingent utility vectors are represented by arbitrary functionals. The definitions of Nash and Bayes equilibria naturally extend to this generalized setting. We characterize equilibrium existence in terms of the preferences of the participating players. It turns out that, given continuity and monotonicity of the preferences, equilibrium exists in every game if and only if all players are averse to uncertainty (i.e., all the functionals are quasi--concave). We further show that if the functionals are either homogeneous or translation invariant then equilibrium existence is equivalent to concavity of the functionals.
    Keywords: Games with incomplete information, equilibrium existence, uncertainty aversion, convex preferences.
    JEL: D81 C72
    Date: 2009–09–29
  2. By: Tatjana Chudjakow (Institute of Mathematical Economics, Bielefeld University); Jörg Vorbrink (Institute of Mathematical Economics, Bielefeld University)
    Abstract: We analyze several exotic options of American style in a multiple prior setting and study the optimal exercise strategy from the perspective of an ambiguity averse buyer in a discrete time model of Cox–Ross–Rubinstein style. The multiple prior model relaxes the assumption of a known distribution of the stock price process and takes into account decision maker’s inability to completely determine the underlying asset’s price dynamics. In order to evaluate the American option the decision maker needs to solve a stopping problem. Unlike the classical approach ambiguity averse decision maker uses a class of measures to evaluate her expected payoffs instead of a unique prior. Given time-consistency of the set of priors an appropriate version of backward induction leads to the solution as in the classical case. Using a duality result the multiple prior stopping problem can be related to the classical stopping problem for a certain probability measure – the worst-case measure. Therefore, the problem can be reduced to identifying the worst-case measure. We obtain the form of the worstcase measure for different classes of exotic options explicitly exploiting the observation that the options can be decomposed in simpler event-driven claims.
    Keywords: American option, optimal stopping, ambiguity, uncertainty aversion
    JEL: G12 D81 C61
    Date: 2009–08
  3. By: Ondrej Rydval; Andreas Ortmann; Sasha Prokosheva; Ralph Hertwig
    Abstract: We replicate three pricing tasks of Gneezy, List and Wu (2006) for which they document the so-called uncertainty effect, namely, that people value a binary lottery over non-monetary outcomes less than other people value the lottery’s worse outcome. While the authors implemented a verbal lottery description, we use a physical lottery format which makes misinterpretation of the lottery structure highly unlikely. We also provide subjects with complete information about the goods they are to value (book gift certificates and one-year deferred payments). Contrary to Gneezy et al. (2006), we observe for all three pricing tasks that subjects’ willingness to pay for the lottery is significantly higher than other subjects’ willingness to pay for the lottery’s worse outcome.
    Keywords: Decision under risk, framing, experiments, task ambiguity.
    JEL: C81 C91 C93 D83
    Date: 2009–07
  4. By: Andreas C. Drichoutis (Department of Agricultural Economics & Rural Development, Agricultural University of Athens); Rodolfo M. Nayga, Jr. (Department of Agricultural Economics & Agribusiness, University of Arkansas); Jayson L. Lusk (Department of Agricultural Economics, Oklahoma State University); Panagiotis Lazaridis (Department of Agricultural Economics & Rural Development, Agricultural University of Athens)
    Abstract: In this paper, we document a violation of normative and descriptive models of decision making under risk. In contrast to uncertainty effects found by Gneezy, List and Wu (2006), some subjects in our experiments valued certain lotteries more than the best possible outcome. We show that the likelihood of observing this effect is positively related to the probability of winning the lottery and negatively related to the value of the maximum outcome. We also demonstrate that this effect can be partially attributed to subjects’ competitiveness and level of comprehension of the lottery mechanism; the competitiveness effects far outweighing comprehension effects.
    Keywords: lottery, risk, competitiveness, Vickrey auctions
    JEL: D81 D44
    Date: 2009
  5. By: Block, Joern; Sandner, Philipp; Spiegel, Frank
    Abstract: The notion of risk and entrepreneurship has been widely discussed in the entrepreneurship literature. Starting a business involves risk and requires a risk-taking attitude. Most studies have com-pared entrepreneurs with non-entrepreneurs such as managers or bankers. So far, little research exists on the risk attitudes of different types of entrepreneurs. This study aims to fill this gap. Our particular focus is on the entrepreneurs’ motivations to start their business. The results show that opportunity entrepreneurs are more willing to take risks than necessity entrepreneurs. In addition, entrepreneurs who are motivated by creativity are more risk-tolerant than other entrepreneurs. The study contributes to the literature about risk attitudes of entrepreneurs and to the literature about necessity and opportunity entrepreneurship.
    Keywords: Entrepreneurship; Self-employment; Risk attitude; Necessity entrepreneurship; Creativity entrepreneurship
    JEL: L26 M13 J23
    Date: 2009–09–29
  6. By: Jose María Abellán Perpiñán (Universidad de Murcia); Fernando Ignacio Sánchez Martínez (Universidad de Murcia); Jorge Eduardo Martínez Pérez (Universidad de Murcia); Ildefonso Méndez Martínez (Universidad de Murcia)
    Abstract: Este proyecto tiene como objetivo estimar las utilidades asociadas a los estados de salud definidos mediante el sistema EuroQol-5D a partir de la medición directa de las preferencias de una muestra de la población andaluza. Los valores obtenidos serán susceptibles de ser utilizados en el marco de estudios de evaluación económica de políticas sanitarias (análisis coste-utilidad) realizados en la comunidad andaluza y en el conjunto del estado. Para la valoración directa de un subconjunto de estados de salud se realizará una encuesta personal asistida por ordenador a una muestra representativa por sexo y cuotas de edad de la población española, extraída de la población residente en Andalucía. Los métodos que se aplicarán para obtener las preferencias y calcular las utilidades tratarán de corregir algunos de los sesgos que pueden afectar a las estimaciones existentes. Así, se adoptarán enfoques teóricos alternativos a los habitualmente empleados que permitirán relajar algunos de los supuestos que han sido puestos en cuestión a la luz de la evidencia empírica, como es el caso de la linealidad de la función de utilidad del tiempo de vida, la validez descriptiva de la teoría de la utilidad esperada o la separabilidad multiplicativa de las preferencias por cantidad y calidad de vida.
    Keywords: EQ-5D, social tariff, utility curvature, probability weighting, rank-dependent utility, time trade-off, value lottery equivalence, certainlty equivalence
    JEL: D61 I10 I18 E I19
    Date: 2009
  7. By: Michele Lombardi; Roberto Veneziani
    Abstract: This paper analyses Rawls's celebrated difference principle, and its lexicographic extension, in societies with a finite and an infinite number of agents. A unified framework of analysis is set up, which allows one to characterise Rawlsian egalitarian principles by means of a weaker version of a new axiom - the Harm Principle - recently proposed by [13]. This is quite surprising, because the Harm principle is meant to capture a liberal requirement of noninterference and it incorporates no obvious egalitarian content. A set of new characterisations of the maximin and of its lexicographic refinement are derived, including in the intergenerational context with an infinite number of agents.
    Keywords: Difference principle, leximin, weak harm priciple, infinite utility streams
    JEL: D63 D70 Q01
    Date: 2009–07

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