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on Utility Models and Prospect Theory |
| By: | Kota Saito |
| Abstract: | This paper investigates a general relationship between risk and time preferences. I consider a decision maker who chooses between consumption of a particular prize in one period and a different prize in another period. The individual believes that today’s good is certain, and that, as the promised date for a future good becomes increasingly distant, the probability of his consuming the good decreases. Under these assumptions, this paper shows that the individuals exhibits the common ratio effect, the certainty effect, and the expected utility if and only if he discounts hyperbolically, quasi-hyperbolically and exponentially, respectively. |
| Keywords: | Allais paradox, hyperbolic discounting |
| JEL: | D11 D81 D91 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1477&r=upt |
| By: | Sara Biagini; Ale\v{s} \v{C}ern\'y |
| Abstract: | The choice of admissible trading strategies in mathematical modelling of financial markets is a delicate issue, going back to Harrison and Kreps (1979). In the context of optimal portfolio selection with expected utility preferences this question has been a focus of considerable attention over the last twenty years. We propose a novel notion of admissibility that has many pleasant features -- admissibility is characterized purely under the objective measure $P$; the wealth of any admissible strategy is a supermartingale under all pricing measures; local boundedness of the price process is not required; neither strict monotonicity, strict concavity nor differentiability of the utility function are necessary; the definition encompasses both the classical mean-variance preferences and the monotone expected utility. For utility functions finite on the real line, our class represents a minimal set containing simple strategies which also contains the optimizer, under conditions that are substantially milder than the celebrated reasonable asymptotic elasticity condition on the utility function. In particular, no condition on the behavior of the utility at $-\infty$ is needed. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:0910.3936&r=upt |
| By: | Albici, Mihaela; Belu, Nicoleta; Tenovici , Cristina |
| Abstract: | Uncertainty means partially or totally knowing the probabilities to accomplish an action’s potential results. |
| Keywords: | Decision; uncertainty conditions; utility |
| JEL: | D81 D80 |
| Date: | 2009–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17954&r=upt |
| By: | Markus Pasche (Friedrich Schiller University Jena, School of Economics and Business Administration) |
| Abstract: | One of Keynes' core issues in his liquidity preference theory is how fundamental uncertainty affects the propensity to hold money as a liquid asset. The paper critically assesses various formal representations of fundamental uncertainty and provides an argument for a more boundedly rational approach to portfolio choice between liquidity and risky assets. The choice is made on the basis of individual beliefs which are subject to mental representations of the underlying economic structure. Self-consciousness arises when the agent is aware of the fact that beliefs are dispersed among agents due to the absence of a "true" model. Responding to this fact by increasing liquidity preference is rationalized by the higher ex post performance of choice. Moreover, we analyze the case that the portfolio is partially financed by debt. It is explored how fundamental uncertainty affects the volume of the portfolio and hence money and credit demand as well as the probability of debt failures. |
| Keywords: | liquidity preference, portfolio choice, self-con?dence, self-consciousness, fundamental uncertainty, bounded rationality, Keynes, Knight |
| JEL: | G11 D81 E41 B31 |
| Date: | 2009–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-085&r=upt |
| By: | Kelvin Balcombe; Iain Fraser |
| Abstract: | A new approach is developed for the treatment of 'Don't Know' (DK) responses, within Choice Experiments. A DK option is motivated by the need to allow respondents the opportunity to express uncertainty. Our model explains a DK using an entropy measure of the similarity between options given to respondents within the Choice Experiment. We illustrate our model by applying it to a Choice Experiment examining consumer preferences for nutrient contents in food. We find that similarity between options in a given choice set does explain the tendency for respondents to report DK. |
| Keywords: | Choice Experiment; Respondent Uncertainty; Bayesian Methods |
| JEL: | C35 I18 Q18 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0916&r=upt |
| By: | Karl Schlag; Joël van der Weele |
| Abstract: | Scoring rules that elicit an entire belief distribution through the elicitation of point beliefs are time-consuming and demand considerable cognitive e¤ort. Moreover, the results are valid only when agents are risk-neutral or when one uses probabilistic rules. We investigate a class of rules in which the agent has to choose an interval and is rewarded (deterministically) on the basis of the chosen interval and the realization of the random variable. We formulate an e¢ ciency criterion for such rules and present a speci.c interval scoring rule. For single- peaked beliefs, our rule gives information about both the location and the dispersion of the belief distribution. These results hold for all concave utility functions. |
| Keywords: | Belief elicitation, scoring rules, subjective probabilities |
| JEL: | C60 C91 D81 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1176&r=upt |
| By: | Ariel Rubinstein; Yuval Salant |
| Date: | 2009–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:814577000000000374&r=upt |
| By: | Leon Vinokur (Queen Mary, University of London) |
| Abstract: | The Prospect Theory proposes to assess outcomes relative to a reference point (or benchmark). Although the literature recognises the relevance of dynamic benchmarks, most of the applications of Prospect Theory employ static reference points (or a status quo). This paper aims to develop a Prospect Theory framework for investment under uncertainty subject to a dynamic reference point, within the context of environmental policy making, where the distinction between a dynamic and a static frameworks is crucial. I evince that, in contrast to the static framework, in a dynamic framework the investor measures not only the absolute but also the relative risk premium (Sharpe ratio) of the investment opportunity, incorporating the risks and returns of a reference portfolio. I propose that there exists a relation between static and dynamic frameworks. Using the dynamic framework, I argue that in the environmental context international co-operation is the key to a successful environmental policy. |
| Keywords: | Prospect theory, Dynamic reference, Sustainable development |
| JEL: | D46 G18 Q58 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp651&r=upt |
| By: | Robin P. Cubitt (School of Economics, University of Nottingham); Robert Sugden (School of Economics, University of East Anglia) |
| Abstract: | This paper presents a new iterative procedure for solving finite noncooperative games, the reasoning-based expected utility procedure (RBEU), and compares this with existing iterative procedures. RBEU deletes more strategies than iterated deletion of strictly dominated strategies, while avoiding the conceptual problems associated with iterated deletion of weakly dominated strategies. It uses a sequence of “accumulation” and “deletion” operations to categorise strategies as permissible and impermissible; strategies may remain uncategorised when the procedure halts. RBEU and related “categorisation procedures” can be interpreted as tracking successive steps in players’ own reasoning. |
| JEL: | C72 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2009-16&r=upt |