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on Utility Models and Prospect Theory |
| By: | Sabrina Teyssier (Thurgau Institute of Economics - Universität Konstanz, GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| 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 first 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 significantly and negatively correlated with the contribution decision of first 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 first 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 contribu- tion |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00422669_v1&r=upt |
| By: | Marc Oliver Rieger (Institute of Mathematical Economics, Bielefeld University) |
| Abstract: | We demonstrate that in simple 2 X 2 games (cumulative) prospect theory preferences can be evolutionarily stable, i.e. a population of players with prospect theory preferences can not be invaded by more rational players. This holds also if probability weighting is applied to the probabilities of mixed strategies. We also show that in a typical game with infinitely many strategies, the "war of attrition", probability weighting is evolutionarily stable. Finally, we generalize to other notions of stability. Our results may help to explain why probability weighting is generally observed in humans, although it is not optimal in usual decision problems. |
| Keywords: | prospect theory, existence of Nash equilibria, evolutionary stability |
| JEL: | C70 C73 D81 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:422&r=upt |
| By: | Wolfgang Karl Härdle; Christian Friedrich Wolfgang Kirchner |
| Abstract: | Die Krise der internationalen Finanzmärkte hat die allgemeine Wahrnehmung für die in diesen Märkten inhärenten Risiken merklich verändert. Glaubten manche Anleger in den Boomphasen der Finanzmärkte, dass sich eine hohe Kapitalrendite mit geringem Risiko verbinden ließe, wenn man nur die Finanzprodukte entsprechend gestaltete, hat sich diese Wahnvorstellung zwischenzeitlich verflüchtigt. Will man vernünftig mit diesen Risiken umgehen, ist es notwendig, diese quantifizieren zu können. Hier gilt es, eine Reihe methodischer Probleme zu bewältigen, da sich einfache statistische Methodiken als nicht adäquat für die vielschichtigen Finanzmarktrisiken erweisen. Die Vielschichtigkeit dieser Risiken hat in den letzten Jahrzehnten zugenommen, insbesondere seitdem hypothekengesicherte Darlehen in verbriefter und verpackter Form auf Finanzmärkten abgesetzt wurden. Der Fokus der folgenden Ausführungen liegt bei der Quantifizierung der Risikoeinschätzungen, und zwar unter Beachtung von Wahrnehmungsproblemen, wie sie in der modernen Verhaltensökonomik erörtert werden. Daneben werden aber auch Probleme des demographischen Risikos angesprochen. |
| Keywords: | pricing kernels, risk aversion, risk neutral density |
| JEL: | B23 C14 G32 K22 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-045&r=upt |
| By: | Simone Farinelli |
| Abstract: | We have embedded the classical theory of stochastic finance into a differential geometric framework called Geometric Arbitrage Theory and show that it is possible to: - Write arbitrage as curvature of a principal fibre bundle. - Parameterize arbitrage strategies by its holonomy. - Extend the Fundamental Theorem of Asset Pricing by a differential homotopic characterization for both complete and not complete arbitrage free markets. - Characterize geometric arbitrage theory by five principles and show they they are compatible with the classical theory of stochastic finance. - Derive for a closed market the equilibrium solution for market portfolio and dynamics in the cases where: --> Arbitrage is allowed but minimized. --> Arbitrage is not allowed. - Prove that the no-free-lunch-with-vanishing-risk condition is equivalent to the existence of a utility maximizer. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:0910.1671&r=upt |
| By: | Hopfensitz, Astrid; Wranik, Tanja |
| Abstract: | Investment behavior is traditionally investigated with the assumption that risky investment is on average advantageous. However, this may not always be the case. In this paper, we experimentally studied investment choices made by students and financial professionals under favorable and unfavorable market conditions in a multi-round investment game. In particular, the probability of winning was set so that investment in one condition was advantageous, and in one condition was disadvantageous. To investigate who is more likely to adapt their investment behaviors to the changing market conditions, we also measured personality and self-efficacy. We expected that investment behavior in changing markets could be predicted by a combination of experience (students, professionals), personality (anxiety, optimism, impulsivity, and Openness to Experience), and self-efficacy (belief in one’s ability to make good decisions in an investment task). Results indicate that professionals do not significantly differ from students in their decisions. Personality and self-efficacy both predicted investment behavior. In particular, we found that optimism and anxiety were a liability in unfavorable markets, leading to unreasonable levels of risk. Impulsivity was a liability in both favorable and unfavorable markets, leading to high risk on unfavorable markets, and low risk in favorable markets. Openness to experience was an asset in unfavorable markets, leading to adjusted risk taking. Finally, self-efficacy was generally related to higher levels of risk. |
| Keywords: | risk taking; field experiment; personality; unfavorable conditions; professionals |
| JEL: | D53 D81 G11 C93 C91 D14 |
| Date: | 2009–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17835&r=upt |
| By: | E. Agliardi |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:677&r=upt |
| By: | Avouyi-Dovi, S.; Sahuc, J-G. |
| Abstract: | Several recent papers are devoted to the examination of the central banker's behaviour in an uncertain economic environment. This paper proposes, from a central banker's point of view, a synthesis of the main sources of uncertainty as well as an illustration of their effects within an analytical framework. In particular, it shows that depending on the type of uncertainty and the choice of the selected loss function, the recommendations for monetary policy can be noticeably different. Retaining an ad hoc loss function - discretionary choice - in place of an endogenous loss function - choice consistent with the structural parameters - can involve considerable welfare losses. |
| Keywords: | Monetary policy , Uncertainty , Macroeconomic Model. |
| JEL: | D81 E52 E61 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:241&r=upt |
| By: | Kaushik Basu |
| Abstract: | The paper argues that economism and, in particular, the individual drive to maximize utility and amass profit are not enough to ensure the efficient functioning of an economy; and that even for elementary economic activities, such as trade, exchange and contracting to occur smoothly, it is essential that human beings be endowed with appropriate social norms, such as a critical level of trustworthiness. This, in turn, implies that an economy’s development can depend significantly on whether the citizen is endowed with the relevant norms. Where these norms come from and how they gather stability remain open questions, though we can get some important insights from theories of evolutionary processes. |
| Keywords: | ecomism, economic rationality, profit, elementary economic, economy development, theories, economics, evolutionary processes trade, exchange, utility, human beings, rationality, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2240&r=upt |