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on Utility Models and Prospect Theory |
| By: | Gerald Eisenkopf; Sabrina Teyssier |
| Abstract: | In tournaments, the large variance in effort provision is incompatible with standard economic theory. In our experiment we test theoretical predictions about the role of envy and loss aversion in tournaments. Our results confirm that envy implies higher effort while loss aversion increases the variance of effort. Moreover, we show that standard theory provides a good explanation for competitive behavior when envy and loss aversion do not play a role in the decision making process. |
| Keywords: | Tournament, Envy, Loss Aversion |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0052&r=upt |
| By: | Sacha Bourgeois-Gironde (IJN - Institut Jean-Nicod - CNRS : UMR8129 - Ecole Normale Supérieure de Paris - ENS Paris - Ecole des Hautes Etudes en Sciences Sociales (EHESS)); Raphaël Giraud (CRESE - Centre de REcherche sur les Stratégies Economiques - Université de Franche-Comté) |
| Abstract: | Framing effects occur when different descriptions of thesame decision problem give rise to divergent decisions. They can be seen as a violation of the decision-theoretic version of the principle of extensionality (PE). The PE in logic means that two logically equivalent sentences can be substituted salva veritate. We explore what this notion of extensionality becomes in decision contexts. Violations of extensionality may have rational grounds. Following some ideas proposed by the psychologist C. McKenzie we contend that framing effects are justified when the selection of one particular frame conveys choice relevant information. We first discuss this idea from a philosophical point of view, and proceed next to formalize it in the context of the Bolker Jeffrey decision theory. |
| Keywords: | Framing effects; Extensionality; Invariance principle; Conversational implicatures; rationality |
| Date: | 2009–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00098001_v1&r=upt |
| By: | Andrea Conte (Strategic Interaction Group, Max-Planck-Institut für Okonomik, Jena, Germany); Peter G. Moffatt (School of Economics, University of East Anglia, Norwich, UK) |
| Abstract: | Experimental data on social preferences present a number of features that need to be incorporated in econometric modelling. We explore a variety of econometric modelling approaches to the analysis of such data. The approaches under consideration are: the random utility approach (in which it is assumed that each possible action yields a utility with a deterministic and a stochastic component, and that the individual selects the action yielding the highest utility); the random behavioural approach (which assumes that the individual computes the maximum of a deterministic utility function, and that computational error causes their observed behaviour to depart stochastically from this optimum); and the random preference approach (in which all variation in behaviour is attributed to stochastic variation in the parameters of the deterministic component of utility). These approaches are applied in various ways to an experiment on fairness conducted by Cappelen et al. (2007). At least two of the models that we estimate succeed in capturing the key features of the data set. |
| Keywords: | Econometric modelling and estimation, model evaluation, individual behaviour, fairness |
| JEL: | C51 C52 C91 D63 |
| Date: | 2010–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-042&r=upt |
| By: | Tol, Richard S. J.; Anthoff, David |
| Abstract: | We apply four alternative decision criteria, two old ones and two new, to the question of the appropriate level of greenhouse gas emission reduction. In all cases, we consider a uniform carbon tax that is applied to all emissions from all sectors and all countries; and that increases over time with the discount rate. For a one per cent pure rate of the time preference and a rate of risk aversion of one, the tax that maximises expected net present welfare equals $120/tC in 2010. However, we also find evidence that the uncertainty about welfare may well have fat tails so that the expectation exists only by virtue of the finite number of runs in our Monte Carlo analysis. This confirms Weitzman's Dismal Theorem. We therefore consider minimax regret as a decision criterion. As regret is defined on the positive real line, we in fact consider large percentiles instead of the ill-defined maximum. Depending on the percentile used, the recommended tax lies between $100 and $170/tC. Regret is a measure of the slope of the welfare function, while we are in fact concerned about the level of welfare. We therefore minimise the tail risk, defined as the expected welfare below a percentile of the probability density function without climate policy. Depending of the percentile used, the recommended tax lies between $20 and $330/tC. We also minimise the fatness of the tails, as measured by the p-value of the test of the hypothesis that recursive mean welfare is stationary in the number of Monte Carlo runs. We cannot reject the null hypothesis of non-stationary at the 5% confidence level, but come closest for an initial tax of $50/tC. All four alternative decision criteria rapidly improve as modest taxes are introduced, but gradually deteriorate if the tax is too high. That implies that the appropriate tax is an interior solution. In stark contrast to some of the interpretations of the Dismal Theorem, we find that fat tails by no means justify arbitrarily large carbon taxes. |
| Keywords: | Climate change/integrated assessment/decision making under uncertainty/deep uncertainty/fat-tailed risk/dismal theorem |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp348&r=upt |
| By: | Duffy, Sean; Smith, John |
| Abstract: | Prior studies have found that subjects prefer an improving sequence of income over a constant sequence, even if the constant sequence offers a larger present discounted value. However, little is known about how these preferences vary with the size of the wage payments. In each of our three studies, we find a relationship between the preference for increasing payments and the size of the payments. Further, our measure of the shape of the utility curve is not significantly related to this behavior. Our results roughly confirm an earlier theoretical prediction that the preference for increasing wage payments will be largest for payments which are neither very likely nor very unlikely to cover the cost of effort. Finally, consistent with the literature, we find mixed evidence regarding the applicability of these time preferences in domains other than money. |
| Keywords: | time preference; experimental economics; intertemporal choice |
| JEL: | D90 C91 |
| Date: | 2010–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23559&r=upt |
| By: | Kasper Larsen; Hang Yu |
| Abstract: | This paper studies the utility maximization problem with changing time horizons in the incomplete Brownian setting. We first show that the primal value function and the optimal terminal wealth are continuous with respect to the time horizon $T$. Secondly, we exemplify that the expected utility stemming from applying the $T$-horizon optimizer on a shorter time horizon $S$, $S < T$, may not converge as $S\uparrow T$ to the $T$-horizon value. Finally, we provide necessary and sufficient conditions preventing the existence of this phenomenon. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.5057&r=upt |
| By: | Ingo E. Isphording |
| Abstract: | This study analyzes the relationship of individual risk attitudes and occupational sorting with respect to occupational earnings risk. By using the German Mikrozensus, a precise measure for earnings risk is computed as the occupation-wide standard deviation of wages. Following the procedure proposed by Bonin (2007), this earnings risk measure is used as dependent variable in cross-sectional and panel data estimations using the SOEP data of 2004 and 2006, including a measure of the individual willingness to take risks. The significant relationship in cross-sectional analyses vanishes when controlling for unobserved heterogeneity. Cross-sectional results seem to be driven by the correlation of unobserved ability and willingness to take risks, and are potentially biased by an attenuation bias due to unstable risk preferences. This study contributes to the existing literature by showing the importance of controlling for unobserved heterogeneity and instability of attitudes when examing the effects of personality traits in labor market decisions. |
| Keywords: | Risk attitudes; occupational sorting; earnings risk; mundlak transformation |
| JEL: | J31 J24 D81 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0187&r=upt |
| By: | Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Christophe Labreuche (UMP CNRS/THALES - Unité mixte de physique CNRS/Thalès - CNRS : UMR137 - THALES) |
| Abstract: | The main advances regarding the use of the Choquet and Sugeno integrals in multi-criteria decision aid over the last decade are reviewed. They concern mainly a bipolar extension of both the Choquet integral and the Sugeno integral, interesting particular submodels, new learning techniques, a better interpretation of the models and a better use of the Choquet integral in multi-criteria decision aid. Parallel to these theoretical works, the Choquet integral has been applied to many new fields, and several softwares and libraries dedicated to this model have been developed. |
| Keywords: | Choquet integral, Sugeno integral, capacity, bipolarity, preferences |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00496558_v1&r=upt |