
on Utility Models and Prospect Theory 
By:  Monika Bier (Institute of Mathematical Economics, Bielefeld University); Daniel Engelage (Bonn Graduate School of Economics (BGSE), University of Bonn) 
Abstract:  We consider longrun behavior of agents assessing risk in terms of dynamic convex risk measures or, equivalently, utility in terms of dynamic variational preferences in an uncertain setting. By virtue of a robust representation, we show that all uncertainty is revealed in the limit and agents behave as expected utility maximizer under the true underlying distribution regardless of their initial risk anticipation. In particular, risk assessments of distinct agents converge. This result is a generalization of the fundamental BlackwellDubins Theorem, cp. [Blackwell & Dubins, 62], to convex risk. We furthermore show the result to hold in a nontimeconsistent environment. 
Keywords:  Dynamic Convex Risk Measures, Multiple Priors, Uncertainty, Robust Representation, TimeConsistency, BlackwellDubins 
JEL:  C61 C65 D81 
Date:  2010–05 
URL:  http://d.repec.org/n?u=RePEc:bie:wpaper:433&r=upt 
By:  Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University) 
Abstract:  This article experimentally studies a twostage elimination contest and compares its performance with a onestage contest. Contrary to the theory, the twostage contest generates higher revenue than the equivalent onestage contest. There is significant overdissipation in both stages of the twostage contest and experience diminishes overdissipation in the first stage but not in the second stage. Our experiment provides evidence that winning is a component in a subject’s utility. A simple behavioral model that accounts for a nonmonetary utility of winning can explain significant overdissipation in both contests. It can also explain why the twostage contest generates higher revenue than the equivalent onestage contest. 
Keywords:  rentseeking, contest, contest design, experiments, risk aversion, overdissipation 
JEL:  C72 C91 D72 
Date:  2009–07 
URL:  http://d.repec.org/n?u=RePEc:chu:wpaper:0904&r=upt 
By:  Curtis R. Price (Department of Economics & Finance, College of Business, University of Southern Indiana); Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University) 
Abstract:  We design an experiment to test if the manner in which subjects receive the endowment has any bearing on the amount of overbidding in contests. We find that overbidding is significantly higher when subjects are given a large perexperiment endowment rather than when the endowment is given perperiod. Riskaversion and nonmonetary utility of winning play important roles in explaining our findings. 
Keywords:  rentseeking, contest, experiments, overbidding, endowment 
JEL:  C72 C91 D72 
Date:  2009–07 
URL:  http://d.repec.org/n?u=RePEc:chu:wpaper:0907&r=upt 
By:  Nicole El Karoui (CMAP  Centre de Mathématiques Appliquées  CNRS : UMR7641  Polytechnique  X, PMA  Laboratoire de Probabilités et Modèles Aléatoires  CNRS : UMR7599  Université Pierre et Marie Curie  Paris VI  Université ParisDiderot  Paris VII); Mohamed M'Rad (CMAP  Centre de Mathématiques Appliquées  CNRS : UMR7641  Polytechnique  X) 
Abstract:  The paper proposes a new approach to consistent stochastic utilities, also called forward dynamic utility, recently introduced by M. Musiela and T. Zariphopoulou. These utilities satisfy a property of consistency with a given incomplete financial market which gives them properties similar to the function values of classical portfolio optimization. First, we derive a non linear stochastic PDEs that satisfy consistent stochastic utilities processes of Itô type and their dual convex conjugates. Then, under some assumptions of regularity and monotony on the stochastic flow associated with the optimal wealth as function of the initial capital, and on the optimal state price dual process, we characterize all consistent utilities for a given increasing optimal wealth process from the composition of the dual optimal process and the inverse of the optimal wealth. This allows us to reduce the resolution of fully nonlinear second order utility SPDE to the existence of monotone solutions of two stochastic differential equations. We also, express the volatility of consistent utilities as an operator of the first and the second order derivatives of the utility in terms of the optimal primal and dual policies. 
Keywords:  forward utility; performance criteria; horizonunbiased utility; consistent utility; progressive utility; portfolio optimization; optimal portfolio; duality; minimal martingale measure; Stochastic flows SDE; Stochastic partial differential equations; 
Date:  2010–04–01 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal00477381_v2&r=upt 
By:  Elyès Jouini (CEREMADE  CEntre de REcherches en MAthématiques de la DEcision  CNRS : UMR7534  Université Paris Dauphine  Paris IX); Clotilde Napp (DRM  Dauphine Recherches en Management  CNRS : UMR7088  Université Paris Dauphine  Paris IX) 
Abstract:  In this paper, we characterize subjective probability beliefs leading to a higher equilibrium market price of risk. We establish that Abel's result on the impact of doubt on the risk premium is not correct (see Abel, A., 2002. An exploration of the effects of pessimism and doubt on asset returns. Journal of Economic Dynamics and Control, 26, 10751092). We introduce, on the set of subjective probability beliefs, market price of risk dominance concepts and we relate them to well known dominance concepts used for comparative statics in portfolio choice analysis. In particular, the necessary first order conditions on subjective probability beliefs in order to increase the market price of risk for all nondecreasing utility functions appear as equivalent to the monotone likelihood ratio property. 
Keywords:  Pessimism, optimism, doubt, stochastic dominance, risk premium, market price of risk, riskiness, portfolio dominance, monotone likelihood ratio 
Date:  2008–11 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:halshs00176611_v2&r=upt 
By:  Monika Bier (Institute of Mathematical Economics, Bielefeld University) 
Abstract:  In this paper we give an alternative characterization for timeconsistent sets of measures in a discrete setting. For each measure p in a timeconsistent set P we get a distinct set of predictable processes which in return describe the p uniquely. This implies we get a onetoone correspondence between timeconsistent sets of measures and sets of predictable processes with specifc features. 
Keywords:  Multiple Priors, TimeConsistency, Ambiguity, Uncertainty Aversion 
JEL:  D81 
Date:  2010–05 
URL:  http://d.repec.org/n?u=RePEc:bie:wpaper:434&r=upt 
By:  Elyès Jouini (CEREMADE  CEntre de REcherches en MAthématiques de la DEcision  CNRS : UMR7534  Université Paris Dauphine  Paris IX); Clotilde Napp (DRM  Dauphine Recherches en Management  CNRS : UMR7088  Université Paris Dauphine  Paris IX) 
Abstract:  Can investors with irrational beliefs be neglected as long as they are rational on average ? Do their trades cancel out with no consequences on prices, as implicitly assumed by traditional models? We consider a model with irrational investors, who are rational on average. We obtain waves of pessimism and optimism that lead to countercyclical market prices of risk and procyclical riskfree rates. The variance of the state price density is greatly increased. The long run riskreturn relation is mod i ed; in particular, the long run market price of risk might be higher than both the instantaneous and the rational ones. 
Keywords:  irrational investors, rational on average 
Date:  2010 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:halshs00488481_v1&r=upt 
By:  Duygu Yengin (School of Economics, University of Adelaide) 
Abstract:  We study the allocation of collectively owned indivisible goods when monetary transfers are possible. We restrict our attention to incentive compatible mechanisms which allocate the goods efficiently. Among these mechanisms, we characterize those that respect welfare lower bounds. The main characterization involves the identicalpreferences lowerbound: each agent should be at least as well off as in an hypothetical economy where all agents have the same preference as hers, no agent envies another, and the budget is balanced. This welfare lowerbound grants agents equal rights/responsibilities over the jointly owned resources but insures agents against the heterogeneity in preferences. We also study the implications of imposing variable population axioms together with welfare bounds. 
Keywords:  collective ownership, allocation of indivisible goods and money, NIMBY problems, imposition of tasks, the Groves mechanisms, the identicalpreferences lowerbound, individual rationality, the standalone lowerbound, kfairness, population monotonicity 
JEL:  C79 D61 D63 
Date:  2010–05 
URL:  http://d.repec.org/n?u=RePEc:adl:wpaper:201005&r=upt 