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on Utility Models and Prospect Theory |
| By: | Singh, Nirvikar |
| Abstract: | This essay provides an elementary, unified introduction to resource allocation under uncertainty in competitive markets. The coverage includes decision-making under uncertainty, measuring risk and risk aversion, insurance and asset markets, and asymmetric information. |
| Keywords: | Uncertainty; risk; risk aversion; insurance; asset markets; asymmetric information |
| JEL: | D01 D80 |
| Date: | 2010–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21556&r=upt |
| By: | Naqvi, Nadeem |
| Abstract: | This paper examines some of the consequences for economic theory of the replacement of binary personal preferences by non-binary personal preferences in an Arrow-Debreu society as in Debreu (1959), and reaches the conclusion that there is both much damage to existing theory and greater opportunity for providing formal explanations of such phenomena as discrimination, personal freedoms and power, among others, which are impossible to explain at a formal level on the basis of an economic theory that is founded on a choice theory that is based exclusively on binary relational personal preferences. |
| Keywords: | Choice theory; decision theory; preference; binary relational logic; non-binary relational logic; utility function; expected utility; game theory; theory of value; discrimination; race; gender |
| JEL: | E0 D0 B0 C0 J0 |
| Date: | 2010–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21522&r=upt |
| By: | Schipper, Burkhard C |
| Abstract: | I develop awareness-dependent subjective expected utility by taking unawareness structures introduced in Heifetz, Meier, and Schipper (2006, 2008, 2009) as primitives in the Anscombe-Aumann approach to subjective expected utility. I observe that a decision maker is unaware of an event if and only if her choices reveal that the event is "null" and the negation of the event is "null". Moreover, I characterize "impersonal" expected utility that is behaviorally indistinguishable from awareness-dependent subject expected utility and assigns probability zero to some subsets of states that are not necessarily events. I discuss in what sense impersonal expected utility can not represent unawareness. |
| Keywords: | Unawareness; awareness; unforeseen contingencies; null; zero probability; subjective expected utility; Anscombe-Aumann; small worlds; extensionality of acts; event exchangeability |
| JEL: | D81 C70 D80 C72 |
| Date: | 2010–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21491&r=upt |
| By: | Lampi, Elina (Department of Economics, School of Business, Economics and Law, Göteborg University); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We analyze the impacts of birth order and presence/absence of siblings on risk preferences with respect to economic, health/safety, and sport/lifestyle related risks. We study both the answer to a hypothetical lottery question and stated risky behavior and find that middle-borns are consistently less risk averse than others irrespective of the type of risk. Moreover, the answer to the lottery question is strongly correlated with economic and sport/lifestyle related risky behavior.<p> |
| Keywords: | siblings; birth-order; middle-born; different risks; lottery |
| JEL: | D89 J10 |
| Date: | 2010–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0438&r=upt |
| By: | Michel De Lara; Vincent Martinet; Luc Doyen |
| Abstract: | Economic analysis addresses risk and long-term issues with dis-counted expected utility, focusing on optimality. Viability theory is based on sustainability constraints to be satised over time, focusing on feasibility. We make a bridge between these two approaches by showing that viability is equivalent to an array of degenerate inter-temporal optimization problems. This makes the approach more inter-pretable in economic terms, and especially regarding efficiency. First,the deterministic case is examined. A particular emphasis is put on the connections between the viability kernel and the minimal time of crisis function. Then, we present stochastic viability with the notions of viable scenario and maximal viability probability. We show that the maximal viability probability shares dynamic programming properties with optimal discounted expected utility. Thus, both exhibit time-consistency, which may be a basis for an axiomatization of criteria under risk and long run for public decision-making. |
| Keywords: | Sustainability, uncertainty, multicriteria, viability |
| JEL: | Q01 D81 D63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2010-7&r=upt |
| By: | García-Sanz, María D.; Alcantud, José Carlos R. |
| Abstract: | This paper contributes to the theory of rational choice under multiple criteria. We perform a preliminary study of the properties of decision made by the sequential application of rational choices. This is then used to obtain a characterization of set-valued choice functions that are rational by two sequential criteria, which follows the approach initiated by Manzini and Mariotti (Amer. Econ. Rev., 2007) for single-valued choice functions. Uniqueness is not guaranteed but our proof is constructive and an explicit solution is provided in terms of approximation choice functions. |
| Keywords: | Choice function; rational choice; compound function. |
| JEL: | D00 |
| Date: | 2010–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21487&r=upt |
| By: | Robert Oxoby; William G. Morrison |
| Abstract: | We present results from a laboratory study of loss aversion in the context of intertemporal choice. We investigate whether the provision of (windfall) endowments results in different elicited discount rates relative to subjects who earn income or earn and retain the income for a period before making intertemporal decisions. We hypothesize that loss aversion in an intertemporal choice yields higher discount rates among subjects earning and retaining. Our results support this hypothesis: among subjects who earn and retain their income we elicit substantially higher discount rates relative to those experiencing a windfall gain. |
| JEL: | C91 D91 |
| Date: | 2010–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2010-06&r=upt |
| By: | Enrico G. De Giorgi; David B. Brown; Melvyn Sim |
| Abstract: | We consider choice over a set of monetary acts (random variables) and study a general class of preferences. These preferences favor diversification, except perhaps on a subset of sufficiently disliked acts, over which concentration is instead preferred. This structure encompasses a number of known models in this setting. We show that such preferences can be expressed in dual form in terms of a family of measures of risk and a target function. Specifically, the choice function is equivalent to selection of a maximum index level such that the risk of beating the target function at that level is acceptable. This dual representation may help to uncover new models of choice. One that we explore in detail is the special case of a bounded target function. This case corresponds to a type of satisficing and has descriptive relevance. Moreover, the model results in optimization problems that may be efficiently solved in large-scale. |
| JEL: | D81 G11 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2010:2010-07&r=upt |
| By: | Cesaltina Pires (Departamento de Gestão, Universidade de Evora and CEFAGE-UE); Andreia Dionisio (Departamento de Gestão, Universidade de Evora and CEFAGE-UE); Luís Coelho (Departamento de Gestão, Universidade de Evora and CEFAGE-UE) |
| Abstract: | This paper estimates von Neumann andMorgenstern utility functions comparing the generalized maximum entropy (GME) with OLS, using data obtained by utility elicitation methods. Thus, it provides a comparison of the performance of the two estimators in a real data small sample setup. The results confirm the ones obtained for small samples through Monte Carlo simulations. The difference between the two estimators is small and it decreases as the width of the parameter support vector increases. Moreover the GME estimator is more precise than the OLS one. Overall the results suggest that GME is an interesting alternative to OLS in the estimation of utility functions when data is generated by utility elicitation methods. |
| Keywords: | Generalized maximum entropy; Maximum entropy principle; von Neumann and Morgenstern utility; Utility elicitation. |
| JEL: | C13 C14 C49 D81 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cfe:wpcefa:2010_02&r=upt |
| By: | Taguedong, Sylvain Chamberlain |
| Abstract: | In this paper we discuss popular market and default risks modeling. We highlight some shortcomings. Then, we present the prospect and cumulative prospect theories. We discuss again the previous models under behavioral finance framework and get different results. Based on these results, we propose a new Value at Risk measure and make suggestions on other measures. |
| Keywords: | Noise Trading; Value at Risk; Probability of Default; Risk Measure Coherence; Risk Measure's Estimator Coherence |
| JEL: | G1 C5 G0 |
| Date: | 2009–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20641&r=upt |
| By: | Ch'ng , Kean Siang; Loke, Yiing Jia |
| Abstract: | Reciprocal behavior was often explained by perception of fairness derived from either agents’ intention or distributional outcome. In this paper, we demonstrated that fairness perception depended on the evaluability of the partner’s type. We conducted experiments to investigate how workers formed fairness perception on the employers. We found inconsistency in fairness evaluation in the two simulated worker-employer relations; workers derived fairness by comparing own wage with market wage in a one shot interaction, but workers derived fairness based on current and previous wage when interacting with same employer. The reversal of fairness perception suggested the role of evaluability of partners’ attribute in effort decision among workers. |
| Keywords: | Preference reversal; reciprocity; gift exchange; evaluability hypothesis;experiment. |
| JEL: | D86 B21 C92 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21527&r=upt |
| By: | Marco M. Sorge |
| Abstract: | In this note, a class of nonlinear dynamic models under rational expectations is studied. A particular solution is found using a model reference adaptive technique via an extended Kalman filtering algorithm, for which initial conditions knowledge only is required. |
| Keywords: | Nonlinear dynamic systems; Rational Expectations; Extended Kalman Filter |
| JEL: | C5 C6 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse03_2010&r=upt |