nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2010‒03‒20
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Are bygones bygones? By Robin Cubitt; Maria Ruiz-Martos; Chris Starmer
  2. Off-the-peak preferences over government size By Francisco Martínez Mora; M. Socorro Puy
  3. Analyzing loss aversion and diminishing sensitivity in a freight transport stated choice experiment By Lorenzo Masiero; David A. Hensher
  4. Risk and Uncertainty in Health Investment By Takao Asano; Akihisa Shibata
  5. Shift of reference point and implications on behavioral reaction to gains and losses By Lorenzo Masiero; David A. Hensher
  6. Forward dynamic utilities: a new model and new results By Moawia, Alghalith
  7. A comparison of prospect theory in WTP and preference space By John M. Rose; Lorenzo Masiero
  8. On Strategy-proofness and Symmetric Single-peakedness By Jordi Massó; Inés Moreno de Barreda
  9. Is the veil of ignorance transparent ?. By Gaël Giraud; Cécile Renouard
  10. Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation By Wagner, Christian

  1. By: Robin Cubitt (School of Economics, University of Nottingham); Maria Ruiz-Martos (Economics Department, University of Warwick); Chris Starmer (School of Economics, University of Nottingham)
    Abstract: The paper reports an experiment which tests the principle of separability, i.e. that behaviour in a dynamic choice problem is independent of history and of unreachable eventualities. Although this is a well-known principle of orthodox decision theory and central to conventional economic modelling, it has been questioned on grounds suggested by non-expected utility models of choice under risk and by the psychology of affective influences on risk-taking. Our experimental design, which provides between-subjects tests of separability using three treatments in which the history preceding a decision is manipulated, is inspired by these concerns. We expose separability to a clean and harsh test, but find no evidence that it is violated.
    Keywords: Separability; history-independence; non-expected utility; risk and affect
    Date: 2010–01
  2. By: Francisco Martínez Mora; M. Socorro Puy
    Abstract: We show that preferences-bias towards overprovision or underprovision can explain the asymmetric location of electoral candidates with respect to the median voter. We analyze the determinants of preferences off-the-peak and find that: (i) The sign of the third derivative of the policy-induced utility function indicates whether preferences are bias towards overprovision (positive) or underprovision (negative). (ii) The analog of Kimball's coefficient of prudence can be used to measure the asymmetry of preferences. (iii) Consumers’risk aversion and government corruption (in the form of decreasing e¤ectiveness producing public good) induce voters’ preferences to be more intense towards underprovision.
    Date: 2010–02
  3. By: Lorenzo Masiero (Istituto Ricerche Economiche (IRE), Università della Svizzera Italiana, Svizzera); David A. Hensher (Institute of Transport and Logistics Studies (ITLS), The University of Sydney, Australia)
    Abstract: Choice behaviour might be determined by asymmetric preferences whether the consumers are faced with gains or losses. This paper investigates loss aversion and diminishing sensitivity, and analyzes their implications on willingness to pay and willingness to accept measures in a reference pivoted choice experiment in a freight transport framework. The results suggest a significant model fit improvement when preferences are treated as asymmetric, proving both loss aversion and diminishing sensitivity. The implications on willingness to pay and willingness to accept indicators are particular relevant showing a remarkable difference between symmetric and asymmetric model specifications. Not accounting for loss aversion and diminishing sensitivity, when present, produces misleading results and might affect significantly the policy decisions.
    Keywords: freight transport, choice experiments, willingness to pay, preference asymmetry
    JEL: C25 L91
    Date: 2010–03
  4. By: Takao Asano (Faculty of Economics, Okayama University); Akihisa Shibata (Institute of Economic Research, Kyoto University)
    Abstract: Extending the Grossman [12] model of health capital into a stochastic one, we analyze how the presence of Knightian uncertainty about the efficacy of health care affects the optimal health investment behavior of individuals. Using Gilboa and Schmeidler’s [11] model of maxmin expected utility (MMEU) with multiple priors, we show that an agent retains the initial level of health capital if the price of health care lies within a certain range. We also show that the no-investment range expands as the degree of Knightian uncertainty rises.
    Keywords: Health Investment, Risk, Uncertainty
    JEL: D81 I11
    Date: 2010–03
  5. By: Lorenzo Masiero (Istituto Ricerche Economiche (IRE), Università della Svizzera Italiana, Svizzera); David A. Hensher (Institute of Transport and Logistics Studies (ITLS), The University of Sydney, Australia)
    Abstract: It is widely recognized that individual decision making is subject to the evaluation of gains and losses around a reference point. The estimation of discrete choice models increasingly use data from stated choice experiments which are pivoted around a reference alternative. However, to date, the specification of a reference alternative in transport studies is fixed, whereas it is common to observe individuals adjusting their preferences according to a change in their reference point. This paper focuses on individual reactions, in a freight choice context, to a negative change in the reference alternative values, identifying the behavioural implications in terms of loss aversion and diminishing sensitivity. The results show a significant adjustment in the valuation of gains and losses around a shifted reference alternative. In particular, we find an average increase in loss aversion for cost and time attributes, and a substantial decrease for punctuality. These findings are translated to significant differences in the willingness to pay and willingness to accept measures, providing supporting evidence of respondents’ behavioural reaction.
    Keywords: Willingness to pay, gains and losses, freight choice, reference alternative
    JEL: C25 L91
    Date: 2010–03
  6. By: Moawia, Alghalith
    Abstract: We present a new model of forward dynamic utilities. In doing so, we provide unique (viscosity) solutions. In addition, we introduce Hausdorff-continuous viscosity solutions to the portfolio model.
    Keywords: forward dynamic utility; investment; portfolio; uncertainty; risk; stochastic
    JEL: G10 D80
    Date: 2010–03–02
  7. By: John M. Rose (Institute of Transport and Logistics Studies (ITLS), The University of Sydney, Australia); Lorenzo Masiero (Istituto Ricerche Economiche (IRE), Università della Svizzera Italiana, Svizzera)
    Abstract: The importance of willingness to pay (WTP) and willingness to accept (WTA) measures in the evaluation of policy measures has led to a constant stream of research examining survey methods and model specifications seeking to capture and explain the concept of marginal rates of substitution as much as possible. Stated choice experiments pivoted around a reference alternative allow the specification of discrete choice models to accommodate the prospect theory reference dependence assumption. This permits an investigation of theories related to loss aversion and diminishing sensitivity, and to test the discrepancy between WTP and WTA, widely documented within the literature. With more advanced classes of discrete choice models at our disposal, it is now possible to test different preference specifications that are better able to measure WTP and WTA values. One such model allowing for utility to be directly specified in WTP space has recently shown interesting qualities. This paper compares and contrasts models estimated in preference space to those estimated in WTP space allowing for asymmetry in the marginal utilities by estimating different parameters according to reference, gain and loss values. The results suggest a better model fit for the data estimated in WTP space, contradicting the findings of previous researches. The parameter estimates report significant evidence of loss aversion and diminishing sensitivities even though the symmetric specification outperforms the asymmetric ones. Finally, the analysis of the WTP and WTA measures confirms the higher degree of WTA compared to WTP, and highlights the appeal of the WTP space specification in terms of plausibility of the estimated measures.
    Keywords: choice experiments, willingness to pay space, preference asymmetry
    JEL: C25 L91
    Date: 2010–03
  8. By: Jordi Massó; Inés Moreno de Barreda
    Abstract: We characterize the class of strategy-proof social choice functions on the domain of symmetric single-peaked preferences. This class is strictly larger than the set of generalized median voter schemes (the class of strategy-proof and tops-only social choice functions on the domain of single-peaked preferences characterized by Moulin (1980)) since, under the domain of symmetric single-peaked preferences, generalized median voter schemes can be disturbed by discontinuity points and remain strategy-proof on the smaller domain. Our result identifies the specific nature of these discontinuities which allow to design non-onto social choice functions to deal with feasibility constraints.
    Keywords: Strategy-proofness, Single-peaked Preferences, Median Voter, Feasibility Constraints.
    JEL: D7
    Date: 2010–03–05
  9. By: Gaël Giraud (Centre d'Economie de la Sorbonne); Cécile Renouard
    Abstract: Theories of justice in the spirit of Rawls and Harsanyi argue that fair-minded people should aspire to make choices for society as if in the original position, that is, behind a veil of ignorance that prevents them from knowing their own social positions in society. In this paper, we provide a framework showing that preferences in front of the veil of ignorance (i.e., in face of everyday risky situations) are entirely determined by ethical preferences behind the veil. Moreover, by contrast with Kariv & Zame (2008), in many cases of interest, the converse is not true : ethical decisions cannot be deduced from economic ones. This not only rehabilitates distributive theories of justice but even proves that standard decision theory in economic environments cannot be separated from ethical questioning.
    Keywords: Moral preferences, business ethics, social preferences, distributional justice, theory of justice, social choice, original position, veil of ignorance, utilitarianism, maximin principle.
    JEL: D63
    Date: 2010–01
  10. By: Wagner, Christian
    Abstract: In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense. The often-cited `forward bias puzzle' originates from the omission of the risk-premium in standard UIP tests. Consistent with its popularity among market professionals, the carry-trade strategy can be rationalized as it systematically collects risk-premia and generates economic value when applied in multi-currency portfolios.
    Keywords: Exchange rates; Uncovered interest parity; Risk-premia; Carry-trade; Economic value
    JEL: F31
    Date: 2009–08

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