nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒11‒07
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. A Dynamic Ellsberg Urn Experiment By Dominiak, Adam; Dürsch, Peter; Lefort, Jean-Philippe
  2. Unambiguous Events and Dynamic Choquet Preferences By Dominiak, Adam; Lefort, Jean-Philippe
  3. On Price Data Elicitation: a Laboratory Investigation By Morone, Andrea
  4. Eliciting Individual Preferences for Pension Reform By Abid Fourati, Yosr; O'Donoghue, Cathal
  5. Entrepreneurs, Legal Institutions and Firm Dynamics By Neus Herranz; Stefan Krasa; Anne P. Villamil
  6. Irrational Financial Markets By Fabrice Rousseau; Laurent Germain; Fabrice Rousseau; Anne Vanhems
  7. Single-Valuedness of the Demand Correspondence and Strict Convexity of Preferences: An Equivalence Result By Ennio Bilancini; Leonardo Boncinelli
  8. Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy By Dubecq, S.; Mojon, B.; Ragot, X.
  9. Convex and Exact Games with Non-transferable Utility By Csóka Péter; Herings P. Jean-Jacques; Kóczy László Á.; Pintér Miklós
  10. Point Decisions for Interval-Identified Parameters By Kyungchul Song

  1. By: Dominiak, Adam; Dürsch, Peter; Lefort, Jean-Philippe
    Abstract: Two rationality arguments are used to justify the link between conditional and unconditional preferences in decision theory: dynamic consistency and consequentialism. Dynamic consistency requires that ex ante contingent choices are respected by updated preferences. Consequentialism states that only those outcomes which are still possible can matter for updated preferences. We test the descriptive validity of these rationality arguments with a dynamic version of Ellsberg's three color experiment and find that subjects act more often in line with consequentialism than with dynamic consistency.
    Keywords: Non expected utility preferences; ambiguity; updating; dynamic consistency; consequentialism
    JEL: C91 D81
    Date: 2009–09–21
  2. By: Dominiak, Adam; Lefort, Jean-Philippe
    Abstract: This paper explores the relationship between dynamic consistency and the existing notions of unambiguous events for Choquet expected utility preferences. A decision maker is faced with an information structure represented by a filtration. We show that the decision maker's preferences respect dynamic consistency on a fixed filtration if and only if the last stage of the filtration is composed of unambiguous events in the sense of Nehring (1999). Adopting two axioms, conditional certainty equivalence consistency and constrained dynamic consistency to filtration measurable acts, it is shown that the decision maker respects these two axioms on a fixed filtration if and only if the last stage of the filtration is made up of unambiguous events the sense of Zhang (2002).
    Keywords: Choquet expected utility; unambiguous events; filtration; updating; dynamic consistency; consequentialism
    JEL: D81
    Date: 2009–09–21
  3. By: Morone, Andrea
    Abstract: There is abundant literature in experimental research on decision making under risk, which compares, and ranks subjects’ preferences on the basis of some elicitation method. The present paper performs a similar analysis in order to compare them. Since pricing data lead in many cases to some anomalies (i.e. status quo bias endowment effect) we examine three mechanisms to elicit price preferences: willingness-to-pay in a second price auction, willingness-to-accept in a second price auction, and certainty equivalent elicited with BDM. A Bayesian interpretation of our results suggests that it is not possible to state ex-ante the more appropriate elicitation method for a particular subject: for 1/3 of our sample WTP is preferred for 1/3 of our sample WTA is preferred and for the remaining 1/3 BDM is preferred.
    Keywords: willingness-to-pay; willingness-to-accept; BDM; second price auction
    JEL: D81
    Date: 2009–10
  4. By: Abid Fourati, Yosr (National University of Ireland, Galway); O'Donoghue, Cathal (Teagasc Rural Economy Research Centre)
    Abstract: Pension systems have recently been under scrutiny because of the expected population ageing threatening its sustainability. This paper's contribution to the debate is from a political economic perspective as it uses data from a choice experiment to investigate individual preferences for an alternative state pension scheme based around preferences for cost, poverty, retirement age and pension parameters. Answers are used to estimate a lifecycle utility model of preferences towards pensions' parameters. Results suggest that individuals’ value orientation is an important determinant of their preferences. Respondents' income determines which degree of redistribution is preferred. However, preferences according to age are in contradiction with what is suggested in theory.
    Keywords: redistribution, pension system reform, population ageing, stated preferences
    JEL: H0 I3
    Date: 2009–10
  5. By: Neus Herranz; Stefan Krasa; Anne P. Villamil
    Abstract: This paper assesses quantitatively the impact of legal institutions on entrepreneurial firm dynamics. Owners choose firm size, financial structure and default to manage risk. We find: (i) Less risk averse entrepreneurs run bigger firms and it is optimal for them to incorporate, while more risk averse entrepreneurs run smaller firms and generally are better off remaining unincorporated. (ii) More risk-averse owners tend to default more often than the less risk averse, though they carry less debt. (iii) The model estimates a credit constraint, which binds for many but not all entrepreneurs and matches bank lending criteria. The model also finds modest differences in owner risk aversion, consistent with micro studies.
    Date: 2009
  6. By: Fabrice Rousseau (Economics, National University of Ireland, Maynooth); Laurent Germain (Toulouse Business School, France); Fabrice Rousseau (Economics, National University of Ireland, Maynooth); Anne Vanhems (Toulouse Business School, France)
    Abstract: We analyze a model where irrational and rational traders exchange a risky asset with competitive market makers. Irrational traders misperceive the mean of prior information (optimistic/pessimistic bias), the variance of prior information (better/lower than average effect)and the variance of the noise in their private signal (overconfidence/underconfidence bias). When market makers are rational we obtain results identical to Kyle and Wang (1997). However if market makers are irrational, we obtain that moderately underconfident traders can outperform rational ones and that irrational market makers can fare better than rational ones. Lastly we find that extreme level of confidence implies high trading volume.
    Keywords: Irrationality
    Date: 2008
  7. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: If preferences are rational and continuous, then strict convexity implies that the demand correspondence is single-valued (e.g. Barten and B¨ohm, 1982, lemma 7.3). We show that if, in addition, preferences are strictly monotone then the converse is also true, namely single-valuedness of the demand correspondence implies strict convexity of preferences.
    Keywords: Strict convexity; Strict monotonicity; Demand correspondence; Single-valuedness; Demand function
    JEL: D11
    Date: 2009–10
  8. By: Dubecq, S.; Mojon, B.; Ragot, X.
    Abstract: We set up a model where asset price bubbles due to risk shifting can be moderated by capital requirements. However, imperfect information about the ratio of required capital, or, in the context of the sub-prime crisis, the extent of regulatory arbitrage, introduces uncertainty about the risk exposure of intermediaries. Underestimation of regulatory arbitrage may induce households to infer that higher asset prices are due to a decline of risk. First, this mechanism can explain why the risk premia paid by US financial intermediaries did not increase between 2000 and 2007 in spite of its increasing leverage. Second, we provide a theory of the risk taking channel of monetary policy: in the model, the underestimation of risk is larger the lower the level of the risk free interest rate.
    Keywords: Capital requirements, Imperfect Information, Risk-taking Channel of monetary policy.
    JEL: E5 G12 G18 G32
    Date: 2009
  9. By: Csóka Péter; Herings P. Jean-Jacques; Kóczy László Á.; Pintér Miklós (METEOR)
    Abstract: We generalize exactness to games with non-transferable utility (NTU). In an exact game for each coalition there is a core allocation on the boundary of its payoff set. Convex games with transferable utility are well-known to be exact. We study five generalizations of convexity in the NTU setting. We show that each of ordinal, coalition merge, individual merge and marginal convexity can be unified under NTU exactness. We provide an example of a cardinally convex game which is not NTU exact. Finally, we relate the classes of II-balanced, totally II-balanced, NTU exact, totally NTU exact, ordinally convex, cardinally convex, coalition merge convex, individual merge convex and marginal convex games to one another.
    Keywords: operations research and management science;
    Date: 2009
  10. By: Kyungchul Song (Department of Economics, University of Pennsylvania)
    Abstract: This paper focuses on a situation where the decision-maker prefers to make a point-decision when the object of interest is interval-identified. Such a situation frequently arises when the interval-identified parameter is closely related to an optimal policy decision. To obtain a reasonable decision, this paper slices asymptotic normal experiments into subclasses corresponding to localized interval lengths, and finds a local asymptotic minimax decision for each subclass. Then, this paper suggests a decision that is based on the subclass minimax decisions, and explains the sense in which the decision is reasonable. One remarkable aspect of this solution is that the optimality of the solution remains intact even when the order of the interval bounds is misspecified. A small sample simulation study illustrates the solution’s usefulness.
    Keywords: Partial Identification, Inequality Restrictions, Local Asymptotic Minimax Estimation, Semiparametric Efficiency
    JEL: C01 C13 C14 C44
    Date: 2009–09–08

This nep-upt issue is ©2009 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.