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on Utility Models and Prospect Theory |
| By: | Jack Douglas Stecher (Carnegie Mellon University); Timothy Shields (Argyros School of Business & Economics, Chapman University); John Dickhaut (Economic Science Institute, Chapman University) |
| Abstract: | This article develops a method for drawing samples from which it is impossible to infer any quantile or moment of the underlying distribution. The method provides researchers with a way to give subjects the experience of ambiguity. In any experiment, learning the distribution from experience is impossible for the subjects, essentially because it is impossible for the experimenter. We describe our method mathematically, illustrate it in simulations, and then test it in a laboratory experiment. Our technique does not withhold sampling information, does not assume that the subject is incapable of making statistical inferences, is replicable across experiments, and requires no special apparatus. We compare our method to the techniques used in related experiments that attempt to produce an ambiguous experience for the subjects. |
| Keywords: | ambiguity; Ellsberg; Knightian uncertainty; laboratory experiments; ignorance; vagueness JEL Classications: C90; C91; C92; D80; D81 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:08-10&r=upt |
| By: | Harin, Alexander |
| Abstract: | The theorem of existence of ruptures in the probability scale has been proved. The theorem can be used, e.g., in economics and forecasting. It can assist to solve paradoxes such as Allais paradox and the “four-fold-pattern” paradox and to create the correcting formula of forecasting. |
| Keywords: | probability; economics; forecasting; modeling; modelling; utility; decisions; uncertainty; |
| JEL: | D81 C5 E17 C1 |
| Date: | 2010–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22633&r=upt |
| By: | Bommier, Antoine; Chassagnon, Arnold; Le Grand, François |
| Abstract: | We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman (1974), Selden (1978), Epstein and Zin (1989) and Quiggin (1982) are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows us to establish new general results on the impact of risk aversion on savings behaviors. In particular, we show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion. |
| Keywords: | risk aversion, savings behaviors, precautionary savings |
| JEL: | D11 D81 D91 |
| Date: | 2010–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22294&r=upt |
| By: | Attanasi, Giuseppe; Corazzini, Luca; Georgantzis, Nikolaos; Passarelli, Francesco |
| Abstract: | We study, both theoretically and experimentally, the relation between preferred majority thresholds and behavioral traits such as the degree of risk aversion and the subjective confidence on others preferences over the alternative to vote. The main theoretical findings are supported by experimental data. The majority threshold chosen by a subject is positively and significantly correlated with her degree of risk aversion while it is negatively and significantly associated to her con dence on othersvotes. Moreover, in a treatment in which each subject can privately observe the distribution of preferences over a sub-group of participants, we find that the quality of information crowds-out subject's confidence. |
| Keywords: | majority threshold, risk aversion, (over-)confidence |
| JEL: | D91 D72 D81 H11 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22195&r=upt |
| By: | Bommier, Antoine; Zuber, Stéphane |
| Abstract: | The Pareto principle is often viewed as a mild requirement compatible with a variety of value judgements. In particular, it is generally thought that it can accommodate dierent degress of inequality aversion. We show that this is generally not true in time consistent intertemporal models where some uncertainty prevails. |
| Keywords: | inequality aversion, Pareto principle, uncertainty |
| JEL: | D6 D7 D81 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22253&r=upt |
| By: | Gollier, Christian |
| Abstract: | We investigate the comparative statics of "more ambiguity aversion" as defined by Klibanoff, Marinacci and Mukerji (2005) in the context of the static two-asset portfolio problem. It is not true in general that more ambiguity aversion reduces the demand for the uncertain asset. We exhibit some sufficient conditions to guarantee that, ceteris paribus, an increase in ambiguity aversion reduces the demand for the ambiguous asset, and raises the equity premium. For example, this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order. We also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:21919&r=upt |
| By: | Hopfensitz, Astrid; Krawczyk, Michal; Van Winden, Frans |
| Abstract: | This experimental study is concerned with the impact of the timing of the resolution of risk on investment behavior, with a special focus on the role of affect. In a between-subjects design we observe the impact of a substantial delay of risk resolution (2 days) on investment choices. Besides the resolution timing all other factors, including the timing of payout, are held constant across treatments. In addition, state-of-the-art experimental techniques from experimental economics and psychology are used for eliciting preferences and to explicitly measure emotions and personality traits. Participants put their own money at stake. Our main finding is that the timing of the resolution of risk matters for investment, modulated by the probability of investment success. Emotions are found to play a significant role in this respect and explain our main finding. Our results support recent models of decision making under risk trying to incorporate anticipatory emotions but also uncover some important shortcomings related to the dynamics of emotions. |
| Keywords: | investment decision, delayed resolution of risk, emotions |
| JEL: | C91 D91 G11 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:22246&r=upt |
| By: | Hooi Hooi Lean (School of Social Sciences, Universiti Sains Malaysia); Michael McAleer (Erasmus School of Economics, Erasmus University Rotterdam, Tinbergen Institute and Department of Economics and Finance, University of Canterbury); Wing-Keung Wong (Department of Economics, Hong Kong Baptist University) |
| Abstract: | This paper examines investor preferences for oil spot and futures based on mean-variance (MV) and stochastic dominance (SD). The mean-variance criterion cannot distinct the preferences of spot and market whereas SD tests leads to the conclusion that spot dominates futures in the downside risk while futures dominate spot in the upside profit. It is also found that risk-averse investors prefer investing in the spot index, whereas risk seekers are attracted to the futures index to maximize their expected utilities. In addition, the SD results suggest that there is no arbitrage opportunity between these two markets. Market efficiency and market rationality are likely to hold in the oil spot and futures markets. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf744&r=upt |