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on Utility Models and Prospect Theory |
| By: | Galarza, Francisco |
| Abstract: | This paper estimates the risk preferences of cotton farmers in Southern Peru, using the results from a multiple-price-list lottery game. Assuming that preferences conform to two of the leading models of decision under risk--Expected Utility Theory (EUT) and Cumulative Prospect Theory (CPT)--there is strong evidence of moderate risk aversion. Once we include individual characteristics in the estimation of risk parameters, we observe that farmers use subjective nonlinear probability weighting, a behavior consistent with CPT. Interestingly, when we allow for preference heterogeneity via the estimation of mixture models--where the proportion of subjects who behave according to EUT or to CPT is endogenously determined--we see that the majority of farmers’ choices are best explained by CPT. We further hypothesize that the multiple switching behavior observed in our sample can be explained by nonlinear probability weighting made in a context of large random calculation mistakes; the evidence found on this regard is mixed. Finally, we find that attaining higher education is the single most important individual characteristic correlated with risk preferences, a result that suggests a connection between cognitive abilities and behavior towards risk. |
| Keywords: | risk aversion; probability weighting; mixture models; experimental economics; Peru |
| JEL: | C9 D81 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17708&r=upt |
| By: | Sabrina Teyssier (Thurgau Institute of Economics, Kreuzlingen, Switzerland; University of Konstanz, Department of Economics, Germany) |
| Abstract: | This paper analyzes which type of intrinsic preferences drive an agent’s behavior in a sequential public good game depending on whether the agent is ï¬rst or second mover. Theoretical predictions are based on heterogeneity of individuals in terms of social and risk preferences. We modelize preferences according to the inequity aversion model of Fehr and Schmidt (1999) and to the assumption of constant relative risk aversion. Risk aversion is signiï¬cantly and negatively correlated with the contribution decision of ï¬rst movers. Second movers with sufficiently high advantageous inequity aversion free-ride less and reciprocate more than others. Both results are predicted by our model. Nevertheless, no effect of disadvantageous inequity aversion of ï¬rst movers is found in the data while theory predicted it. Our results underline the importance of taking into account the order of agents’ play to correctly understand which type of preferences influences cooperation in voluntary contribution mechanisms. They suggest that individuals’ behavior can be consistent between different experimental games. |
| Keywords: | inequity aversion, risk aversion, public good game, conditional contribution |
| JEL: | C72 C91 D63 D81 H41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0919&r=upt |
| By: | Ernst Fehr (University of Zurich); Klaus M. Schmidt (University of Munich) |
| Abstract: | In this paper we reply to Binmore and Shaked’s criticism of the Fehr-Schmidt model of inequity aversion. We put the theory and their arguments into perspective and show that their criticism is not substantiated. Finally, we briefly comment on the main challenges for future research on social preferences |
| Keywords: | Experiments, other-regarding preferences, inequity aversion |
| JEL: | B41 C90 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:276&r=upt |
| By: | Giuseppe Attanasi, Luca Corazzini, Nikolaos Georgantzis, Francesco Passarelli. |
| Abstract: | We study, both theoretically and experimentally, the relation between preferred majority thresholds and behavioral traits such as the degree of risk aversion and the subjective confidence on others' preferences over the alternatives to vote. The main theoretical findings are supported by experimental data. The majority threshold chosen by a subject is positively and significantly correlated with her degree of risk aversion while it is negatively and significantly associated to her confidence on others' votes. Moreover, in a treatment in which each subject can privately observe the distribution of preferences over a sub-group of participants, we find that the quality of information crowds-out subject's confidence. |
| Keywords: | majority threshold, risk aversion, (over-)confidence, laboratory experiment. |
| JEL: | C91 D72 H11 D81 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:slp:islawp:islawp34&r=upt |
| By: | André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Nathalie Picard (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Anthony Ziegelmeyer (Max Planck Institut, Strategic Interaction Group - (-)) |
| Abstract: | This paper reports results of an experiment designed to analyze the link between risky decisions made by couples and risky decisions made separately by each spouse. We estimate both the spouses and the couples' degrees of risk aversion, we assess how the risk preferences of the two spouses aggregate when they make risky decisions and we shed light on the dynamics of the decision process that takes place when couples make risky decisions. We find that, far from being fixed, the balance of power within the household is malleable. In most couples, men have, initially, more decision-making power than women but women who ultimately implement the joint decisions gain more and more power over the course of decision making. |
| Keywords: | Balance of power; Experiments; Household decision-making; Risk. |
| Date: | 2009–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00418899_v1&r=upt |
| By: | Buurman, Margaretha (Erasmus University Rotterdam); Dur, Robert (Erasmus University Rotterdam); van den Bossche, Seth (TNO Work and Employment) |
| Abstract: | We assess whether public sector employees have a stronger inclination to serve others and are more risk averse than employees in the private sector. A unique feature of our study is that we use revealed rather than stated preferences data. Respondents of a large-scale survey were offered a substantial reward and could choose between a widely redeemable gift certificate, a lottery ticket, or making a donation to a charity. Our analysis shows that public sector employees are significantly less likely to choose the risky option (lottery) and, at the start of their career, significantly more likely to choose the pro-social option (charity). However, when tenure increases, this difference in pro-social inclinations disappears and, later on, even reverses. Our results further suggest that quite a few public sector employees do not contribute to charity because they feel that they already contribute enough to society at work for too little pay. |
| Keywords: | public service motivation, risk aversion, revealed preferences data |
| JEL: | H1 J45 M52 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4401&r=upt |
| By: | Fujikawa, Takemi |
| Abstract: | The ''hot stove effect'' has been studied for repeated-play decision making under uncertainty (also referred to as experience-based decision making) in which the decision makers repeatedly face the Allais-type binary choice problems, and have to learn about the outcome distributions through sampling as the decision makers are not explicitly provided with prior information on the payoff structure. The previous studies have found mixed evidence: some studies have found that the hot stove effect is strong in repeated-play decision making under uncertainty, while other studies have found that the effect is weak. Thus, the evidence is inconsistent. This paper reports an experimental investigation of the hot stove effect in repeated-play decision making under ambiguity. The current experiment involves an ambiguity treatment in which (1) the participants perform two binary repeated-play choice problems, each involving 400-fold choice between a risky option and a riskless option; and (2) in each problem, there are two states of nature available: a favourable state and an unfavourable state, but only one of them obtains on any given trial. The realisation of the actual state is not disclosed to the participants, thus they would be expected to discover the actual state through sampling with immediate feedback. The current results suggest that the magnitude of the hot stove effect is significantly different between repeated-play decision making under uncertainty and repeated-play decision making under ambiguity. I shall show that the hot stove effect is attenuated in repeated-play decision making under ambiguity. |
| Keywords: | Allais-type choices; decisions from experience; risk; uncertainty |
| JEL: | D83 C91 |
| Date: | 2009–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17647&r=upt |
| By: | Laura Valderrama |
| Abstract: | This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. We show how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what we call political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform. We endogenize institutional reform and show a non-monotonic relationship between institutional efficiency and the size of innovation. |
| Keywords: | Corporate governance , Corporate sector , Economic models , Labor mobility , Political economy , Productivity , Technology transfer , Voting power , |
| Date: | 2009–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/194&r=upt |
| By: | Sungu Armagan (College of Business Administration - Florida International University); Manuel Portugal Ferreira (Instituto Politécnico de Leiria); Gerardo A. Okhuysen (University of Utah); Adam D. Galinsky (Kellogg School of Management - Northwestern University) |
| Abstract: | The current research explores the impact of power on temporal commitment preference (an individual?s preference for shorter or longer time durations for agreements in decision making situations) across three countries: Portugal, Turkey, and the United States. A pilot study (N = 356) established cultural differences in uncertainty avoidance, which was expected to impact choices and behaviors involving power and temporality. The main study (N = 433) investigated the relationship between power and temporal commitment preference. Across all countries, high power individuals preferred shorter temporal commitments than low power individuals. In addition, the U.S. participants preferred longer temporal commitments than either the Portuguese or Turkish participants. We argue that differences in uncertainty avoidance help explain some of the differences in individuals? temporal commitment preferences across diverse cultural settings. Implications for practice and future directions are also discussed. |
| Keywords: | Power, Time, National culture, Uncertainty avoidance |
| JEL: | M0 M1 |
| Date: | 2009–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:pil:wpaper:42&r=upt |