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on Utility Models and Prospect Theory |
| By: | Kobi Kriesler; Shmuel Nitzan (Department of Economics, Bar Ilan University) |
| Abstract: | In this study we propose an axiomatic theory of decision-making under risk that is based on a new approach to the modeling of framing that focuses on the subjective statistical dependence between prizes of compared lotteries. Unlike existing models that allow objective statistical dependence, as in Regret Theory, in our model the emphasis is on alternative subjective statistical dependence patterns that are induced by alternative descriptions of the lotteries, i.e., by alternative framing. A distinct advantage of the proposed general descriptive model of choice is its ability to adequately explain a wide variety of behaviors and, in particular, several well-known paradoxes of different types. |
| Keywords: | framing, statistical dependence, non-expected utility, expected value of lottery interchange |
| JEL: | D81 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2009-17&r=upt |
| By: | Luis Roberto Martínez; Christian Jaramillo; Nicolas De Roux; Juan-Camilo Cárdenas |
| Abstract: | The house-money effect –people’s tendency to be more daring with easily-gotten money– is a behavioral pattern that poses questions about the external validity of experiments in economics: to what extent do people behave in experiments like they would have in a real-life situation, given that they play with easily-gotten house money? We ran an economic experiment with 66 students to measure the house-money effect on their risk preferences. They received an amount of money with which they made risky decisions involving losses and gains; a treatment group got the money 21 days in advance and a control group got it the day of the experiment. We find that, when facing possible losses, people in the treatment group showed a lower tolerance to risk than people in the control group. If the players are assumed to have a CRRA utility function and to behave according to expected-utility theory, the risk-attitude adjustment corresponds to an average increase of 1 in their risk aversion coefficient. While the exact pattern of this house-money adjustment differs by gender, it is not possible to determine the sign of this gender effect unambiguously. In any case, it is advisable to include credible controls for the house-money effect in experimental work in economics. |
| Date: | 2010–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:006712&r=upt |
| By: | Lizarazo, Sandra |
| Abstract: | This paper develops a model of debt and default for small open economies that interact with risk averse international investors. The model developed here extends the recent work on the analysis of endogenous default risk to the case in which international investors are risk averse agents with decreasing absolute risk aversion (DARA). By incorporating risk averse investors who trade with a single emerging economy, the present model offers two main improvements over the standard case of risk neutral investors: i.) the model exhibits a better fit of debt-to-output ratio and ii.) the model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets. The paper shows that if investors have DARA preferences, then the emerging economy's default risk, capital flows, bond prices and consumption are a function not only of the fundamentals of the economy---as in the case of risk neutral investors---but also of the level of financial wealth and risk aversion of the international investors. In particular, as investors become wealthier or less risk averse, the emerging economy becomes less credit constrained. As a result, the emerging economy's default risk is lower, and its bond prices and capital inflows are higher. Additionally, with risk averse investors, the risk premium in the asset prices of the sovereign countries can be decomposed into two components: a base premium that compensates the investors for the probability of default (as in the risk neutral base) and an ``excess'' premium that compensates them for taking the risk of default. |
| Keywords: | default; sovereign debt; international investors; risk premium; sovereign spreads |
| JEL: | F34 E44 F41 |
| Date: | 2010–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20794&r=upt |
| By: | Dannenberg, Astrid; Riechmann, Thomas; Sturm, Bodo; Vogt, Carsten |
| Abstract: | In this paper, we analyse if individual inequality aversion measured with simple experimental games depends on whether the monetary endowment in these games is either a windfall gain (“house money”) or a reward for a certain effort-related performance. Moreover, we analyse whether the way of preference elicitation affects the explanatory power of inequality aversion in social dilemma situations. Our results indicate that individual inequality aversion is not generally robust to the way endowments emerge. Furthermore, the use of money earned by real efforts instead of house money does not improve the generally low predictive power of the inequality aversion model. Hypotheses based on the inequality aversion model lose their predictive power when preferences are elicited with earned money. -- |
| Keywords: | individual preferences,inequality aversion,experimental economics,prisoner's dilemma,house money |
| JEL: | C91 C92 H41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:10006&r=upt |
| By: | Laure Cabantous (Nottingham University Business School); Denis Hilton (CLLE, Universite Toulouse II-Le Mirail); Howard Kunreuther (Center for Risk Management and Decision Processes The Wharton School, University of Pennsylvania); Erwann Michel-Kerjan (Center for Risk Management and Decision Processes The Wharton School, University of Pennsylvania) |
| Abstract: | Testing whether risk professionals (here insurers) behave differently under risk and ambiguity when they cover catastrophic risks (floods and earthquakes) and non-catastrophic risks (fires), this paper reports the results of the first field experiment in the United States designed to distinguish two sources of ambiguity: imprecise ambiguity (outside experts agree on a range of probability, but not on any point estimate) versus conflict ambiguity (each expert group provides precise probability estimates which differ from one group to another). Insurers charge higher premiums when faced with ambiguity than when the probability of a loss is well specified. Furthermore they charge more for conflict ambiguity than imprecise ambiguity for flood and hurricane hazards, but less so in the case of fire. The source of ambiguity also impacts causal inferences insurers make to reduce their uncertainty. |
| Keywords: | Ambiguity, Source of Uncertainty, Insurance Pricing, Decision-Making |
| JEL: | C93 D81 D83 |
| Date: | 2010–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:bbr:workpa:7&r=upt |
| By: | Beatrice Acciaio; Hans Foellmer; Irina Penner |
| Abstract: | We study the risk assessment of uncertain cash flows in terms of dynamic convex risk measures for processes as introduced in Cheridito, Delbaen, and Kupper (2006). These risk measures take into account not only the amounts but also the timing of a cash flow. We discuss their robust representation in terms of suitably penalized probability measures on the optional sigma-field. This yields an explicit analysis both of model and discounting ambiguity. We focus on supermartingale criteria for different notions of time consistency. In particular we show how bubbles may appear in the dynamic penalization, and how they cause a breakdown of asymptotic safety of the risk assessment procedure. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1002.3627&r=upt |
| By: | Eijffinger, S.C.W. (Tilburg University) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-3763054&r=upt |
| By: | Ruth Ben-Yashar (Department of Economics, Bar Ilan University); Winston Koh (Singapore Management University); Shmuel Nitzan (Department of Economics, Bar Ilan University) |
| Abstract: | Committee decision making is examined in this study focusing on the role assigned to the committee members. In particular, we are concerned about the comparison between committee performance under specialization and non-specialization of the decision makers. |
| Keywords: | framing, project selection, public policy, collective decision making, committee, uncertain dichotomous choice, specialization, simple majority rule |
| JEL: | D81 D71 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2009-16&r=upt |
| By: | Jean-Pierre Zigrand; Hyun Song Shin; Jon Danielsson |
| Abstract: | Risk is endogenous. Equilibrium risk is the fixed point of the mapping that takes perceived risk to actual risk. When risk-neutral traders operate under Value-at-Risk constraints, market conditions exhibit signs of fluctuating risk appetite and amplification of shocks through feedback effects. Correlations in returns emerge even when underlying fundamental shocks are independent. We derive a closedform solution of equilibrium returns, correlation and volatility by solving the fixed point problem in closed form. We apply our results to stochastic volatility and option pricing. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp647&r=upt |