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on Utility Models and Prospect Theory |
| By: | L.C.G. Pozzi (Erasmus University Rotterdam); C.G. de Vries (Erasmus University Rotterdam); J. Zenhorst (Erasmus University Rotterdam) |
| Abstract: | The equity premium puzzle holds that the coefficient of relative risk aversion estimated from the consumption based CAPM under power utility is excessively high. Moreover, estimates in the literature vary considerably across countries. We gauge the uncertainty pertaining to the country risk aversion estimates by means of jackknife resampling and pooling. The confidence band for the world risk aversion estimate from the pooled country data is much tighter and the pooled point estimate presents less of a puzzle than the individual country estimates. |
| Keywords: | Equity premium puzzle; Jackknife; Pooling |
| JEL: | E21 G12 |
| Date: | 2010–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100007&r=upt |
| By: | Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This paper discusses how a decision maker should deal with uncertainty, both in the sense of a well-known probability distribution of different outcomes and as a situation where also the probability distribution is unknown. A simple baseline model is used throughout the paper, where the decision maker can invest in order to decrease the health risk. Since the investment is risky, the question concerns how much to invest. We derive and compare the optimal investment level for a number of different decision rules: a best guess rule, a maximin rule, an expected value rule, an expected utility rule, and three different rules that beyond risk aversion also reflect ambiguity aversion. Finally, these decision rules are evaluated more broadly.<p> |
| Keywords: | Investment under uncertainty; risk aversion; ambiguity aversion |
| JEL: | D81 H51 I18 |
| Date: | 2010–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0443&r=upt |
| By: | Charles Bellemare; Luc Bissonnette; Sabine Kröger |
| Abstract: | We show how bounds around preferences parameters can be estimated under various levels of assumptions concerning the beliefs of senders in the investment game. We contrast these bounds with point estimates of the preference parameters obtained using non-incentivized subjective belief data. Our point estimates suggest that expected responses and social preferences both play a significant role in determining investment in the game. Moreover, these point estimates fall within our most reasonable bounds. This suggests that credible inferences can be obtained using non-incentivized beliefs. |
| Keywords: | Partial identification, preferences, beliefs, decision making under uncertainty |
| JEL: | C81 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1017&r=upt |
| By: | Jona Linde (University of Amsterdam); Joep Sonnemans (University of Amsterdam) |
| Abstract: | This study attempts to combine two traditional fields in microeconomics: individual decision making under risk and decision making in an interpersonal context. The influence of social comparison on risky choices is explored in an experiment in which participants make a series of choices between lotteries with only positive outcomes. Three kinds of choice situations are employed. In the loss and gain context the social referent receives a fixed payoff that is respectively higher and lower than all possible payoffs of the decision maker. In the neutral context social referent and decision maker will always earn the same amount. In the gain and loss contexts the decision maker has no influence on the earnings of the social referent so strategic behavior or social preferences can play no role. We find that decision makers are more risk-averse in the loss context than in the gain context, with the behavior in the neutral context in between. This result is in opposition to the predictions of prospect theory extrapolated to a social context. |
| Keywords: | Social comparison; social preferences; decision making under risk; experiment |
| JEL: | C91 C92 D63 |
| Date: | 2009–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090097&r=upt |
| By: | Andrey M. Lizyayev (Erasmus University Rotterdam) |
| Abstract: | This paper points out the importance of Stochastic Dominance (SD) efficient sets being convex. We review |
| Keywords: | Stochastic Dominance; Convexity; Risk Aversion; Efficiency |
| JEL: | G11 C63 |
| Date: | 2009–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090112&r=upt |
| By: | Holger Müller (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Eike Benjamin Kroll (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | In this paper, the preference reversal phenomenon known from risk research is investigated according to which subjects prefer gamble A over B in competitive decisions although they reveal higher valuations in terms of a cash equivalent (CE) or a willingness to pay (WTP) for the latter when gambles are assessed separately in monadic judgments. In contrast to the experimental settings of research on risky choices, our studies observed unforced and binding purchase decisions of experienced consumers between real products in natural shopping environments. Results confirm robustness of preference reversals in risk-free purchase decisions indicating that orderings of product preferences reverse significantly between evaluations in monadic and competitive designs. While recent pricing research has been largely focused on monadic designs and suggested BDM mechanisms or second-price auctions for elicitations of consumers’ true willingness to pay, results of our studies indicate a substantial discrepancy between preference orders based on monadic judgments and preferences that consumers reveal in competitive purchase decisions. |
| Keywords: | Preference Reversals, Willingness to Pay, Monadic Designs, Competitive Designs, Pricing Research, Procedure Invariance |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:100003&r=upt |
| By: | Salvador Barrios; Per Iversen; Magdalena Lewandowska; Ralph Setzer |
| Abstract: | This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period. |
| Keywords: | sovereign bond, intra-euro area government bond spreads, spread determinants, financial crisis Barrios, Iversen, Lewandowska, Setzer |
| JEL: | E44 F36 G12 G15 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0388&r=upt |
| By: | Atila Abdulkadiroğlu; Yeon-Koo Che; Yosuke Yasuda |
| Date: | 2010–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000062&r=upt |
| By: | V.Pelligra; A.Isoni; R.Fadda; I.Doneddu |
| Abstract: | Models of social preferences explain departures from pure self-interest as a consequence of either outcome-based or intention-based other-regarding motives. Various experimental studies lend support to the conclusion that subjects behave as if they conditioned their behaviour on the perceived intentions of others. We present a new experiment that explores this as if clause by making the ability to detect intentions a treatment variable. We compare normally developing children with autistic children – typically unable to perceive intentions – and find differences consistent with the hypothesis that behaviour responds to intentions, especially if unkind. |
| Keywords: | Social Preferences; Theory of Mind; Intentionality; Autism |
| JEL: | C72 C91 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201010&r=upt |
| By: | Anke Gerber (Hamburg University); Kirsten I.M. Rohde (Erasmus University Rotterdam) |
| Abstract: | Many empirical studies on intertemporal choice report preference reversals in the sense that a preference between a small reward to be received soon and a larger reward to be received later reverses as both rewards are equally delayed. Such preference reversals are commonly interpreted as contradicting constant discounting. We show that this interpretation is correct only if baseline consumption to which the outcomes are added, remains constant over time. The difficulty with measuring discounting when baseline consumption changes over time, is that delaying an outcome has two simultaneous effects: (1) due to the change in baseline consumption, it changes the increase in utility from receiving the outcome, and (2) it changes the discount factor applied to this increase in utility. In order to draw conclusions about discounting one needs to disentangle these two effects which seems impossible at first sight (Noor, 2009). Yet, in this paper we propose a way to disentangle the two effects. |
| Keywords: | Hyperbolic discounting; Constant discounting; Preference reversals; Decreasing impatience |
| JEL: | D91 D81 |
| Date: | 2009–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090103&r=upt |
| By: | Falko Juessen (TU Dortmund University); Ludger Linnemann (TU Dortmund University); Andreas Schabert (TU Dortmund University) |
| Abstract: | This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large. |
| Keywords: | Sovereign default; asset pricing; fiscal policy; government debt |
| JEL: | E62 G12 H6 E32 |
| Date: | 2009–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090102&r=upt |
| By: | Vorobyev, Oleg Yu. |
| Abstract: | Abstarct. Elements of eventologic axiomatics are offered. Eventology [Vorobyev, 2007], a new direction of probability theory and philosophy, offers the original many-event-based approach to the description of many-agent being and co-being, entering human agents, together with his/her beliefs, directly in the frameworks of scientific research in the form of eventologic distribution of his/her own events. This allows us, by putting together probabilistic and many-event-based representation of information and philosophical concept of event as co-being [Bakhtin, 1920], to offer an axiomatizing eventology which expands Kolmogorov’s axiomatic of probability theory [Kolmogorov, 1933] and axiomatizes an overlapping sciences mathematical eventolanguage for the description of many-agent being and co-being. |
| Keywords: | Event; co-being; probability; Kolmogorov’s axiomatics; eventology; axiomatizing eventology; eventologic axiomatics; universal elementary event; universal event; universal measurable space; universal probability space; eventologic space; name of event; set of names of events; sufficiency of eventologic space; simplicity of eventologic space. |
| JEL: | C0 |
| Date: | 2009–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22575&r=upt |
| By: | Elchanan Ben-Porath; Aviad Heifetz |
| Abstract: | Consider an exchange economy with asymmetric information. What is the set of outcomes that are consistent with common knowledge of rationality and market clearing? To address this question we de ne an epistemic model for the economy that provides a complete description not only of the beliefs of each agent on the relationship between states of nature and prices but also of the whole system of interactive beliefs. The main result, theorem 1, provides a characterization of outcomes that are consistent with common knowledge of rationality and market clearing (henceforth, CKRMC outcomes) in terms of a solution notion - Ex - Post Rationalizability - that is defi ned directly in terms of the parameters that de ne the economy. We then apply theorem 1 to characterize the set of CKRMC outcomes in a general class of economies with two commodities. CKRMC manifests several intuitive properties that stand in contrast to the full revelation property of Rational Expectations Equilibrium: In particular, we obtain that for a robust class of economies: (1) there is a continuum of prices that are consistent with CKRMC in every state of nature, and hence these prices do not reveal the true state, (2) the range of CKRMC outcomes is monotonically decreasing as agents become more informed about the economic fundamentals, and (3) trade is consistent with common knowledge of rationality and market clearing even when there is common knowledge that there are no mutual gains from trade. |
| Keywords: | Common Knowledge of Rationality and Market Clearing in Economies with Asymmetric Information |
| JEL: | D84 D50 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1487&r=upt |