nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2010‒07‒24
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Effect of Risk, Ambiguity and Coordination on Farmers’ Adaptation to Climate Change: A Framed Field Experiment By Francisco Alpizar; Fredrik Carlsson; Maria Naranjo
  2. Теорема о существовании разрывов в шкале вероятностей. Дискретный случай By Harin, Alexander
  3. Classifying Behaviors in Risky Choices By Kontek, Krzysztof
  4. The incentive for prevention in public health Systems By Renaud Bourlès
  5. Probability Weighting as Evolutionary Second-best By Florian Herold; Nick Netzer
  6. Dynamic models of residential ségrégation: an analytical solution By Sébastian Grauwin; Florence Goffette-Nagot; Pablo Jensen
  7. Are beliefs a matter of taste? A case for Objective Imprecise Information By Raphaël Giraud; Jean-Marc Tallon
  8. Risk Pooling, Risk preferences, and Social Networks By Orazio Attansio; Abigail Barr; Juan Camilo Cardenas; Garance Genicot; Costas Mehgir

  1. By: Francisco Alpizar (Environment for Development Center, Tropical Agricultural and Higher Education Center); Fredrik Carlsson (Göteborg University); Maria Naranjo (Environment for Development Center, Tropical Agricultural and Higher Education Center)
    Abstract: The risk of losses of income and productive means due to adverse weather associated to climate change can significantly differ between farmers sharing a productive landscape. It is important to learn more about how farmers react to different levels of risk, under measurable and unmeasurable uncertainty. Moreover, the costs associated to investments in reduced vulnerability to climatic events are likely to exhibit economies of scope. We explore these issues using a framed field experiment that captures realistically the main characteristics of production, and the likely weather related losses of premium coffee farmers in Tarrazu, Costa Rica. Given that the region recently was severely hit by an extreme, albeit very infrequent, climatic event, we expected to observe, and found high levels of risk aversion, but we do observe farmers making trade-offs under different risk levels. Although hard to disentangle at first sight given the high level of risk aversion, we find that farmers opt more frequently for safe options in a setting characterized by unknown risk. Finally, we find that farmers to a large extent are able to coordinate their decisions in order to achieve a lower cost of adaptation, and that communication among farmers strongly facilitates coordination.
    Keywords: Risk Aversion, Ambiguity Aversion, Technology Adoption, Climate change, Field Experiment
    JEL: C93 D81 H41 Q16 Q54
    Date: 2010–06
  2. By: Harin, Alexander
    Abstract: The theorem of existence of the ruptures in the probability scale has been proved for a discrete case. 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 G11 C5 E37 C1
    Date: 2010–07–14
  3. By: Kontek, Krzysztof
    Abstract: This paper presents a nonparametric approach to classification of data from lottery experiments. Using very basic mathematical tools the paper endeavors to answer the questions: How to determine the “average” subject in a group? How to find a subject presenting the most similar behavior to a given one? How to detect outlier subject(s)? How to classify behaviors by their dissimilarity from the perfectly rational decision making? How to rank subjects by risk attitudes? How to cluster subjects? This paper demonstrates that the answer to all of these questions may be found non-parametrically, without the use of any specific model.
    Keywords: Lottery experiments, Certainty Equivalents, Risk Attitude, Cluster Analysis, Nonparametric Methods, Relative Utility Function.
    JEL: D81 C14 C02 C81 C91
    Date: 2010–07–12
  4. By: Renaud Bourlès (École Centrale de Marseille and Greqam)
    Abstract: This paper examines the effect of moral hazard on public health insurance contract. It models primary prevention in a two period model with classification risk. Agent’s preferences appear to play an important role in the optimal determination of preventive effort and insurance between generations. If absolute prudence is larger than twice absolute risk aversion, moral hazard increases intergenerational insurance and classification risk. This highlights a tradeoff between prevention and insurance arising from classification risk. An increase in the difference between prudence and twice risk aversion (that we define as the degree of “protectiveness”) moreover makes public insurance contracts more stable (when competing with spot insurance) if the cost of prevention is low enough when agents preferences exhibit CRRA. Under a formulated utility function with linear reciprocal derivative, we finally show that an increase in agent’s degree of “protectiveness” enhances the stability of public insurance and the extent of intergenerational insurance.
    Keywords: Public health insurance; Classification risk; Moral Hazard; Prudence.
    JEL: D81 D91 G22
    Date: 2010–02–17
  5. By: Florian Herold (Kellogg School of Management, Northwestern University); Nick Netzer (Socioeconomic Institute, University of Zurich)
    Abstract: The economic concept of the second-best involves the idea that multiple simultaneous deviations from a hypothetical first-best optimum may be optimal once the first-best itself can no longer be achieved, since one distortion may partially compensate for another. Within an evolutionary framework, we translate this concept to behavior under uncertainty. We argue that the two main components of prospect theory, the value function and the probability weighting function, are complements in the second-best sense. Previous work has shown that an adaptive S-shaped value function may be evolutionary optimal if decision-making is subject to cognitive or perceptive constraints. We show that distortions in the way probabilities are perceived can further enhance fitness. The second-best optimum involves overweighting of small and underweighting of large probabilities. Behavior as described by prospect theory might therefore be evolution’s second-best solution to the fitness maximization problem. Our model makes empirically testable predictions about the relation between individuals’ value and probability weighting functions.
    Keywords: Probability Weighting, Prospect Theory, Evolution of Preferences
    JEL: D01 D81
    Date: 2010–07
  6. By: Sébastian Grauwin (Phys-ENS - Laboratoire de Physique de l'ENS Lyon - CNRS : UMR5672 - École normale supérieure de Lyon - ENS Lyon, IXXI - Institut Rhône-Alpin des systèmes complexes - INRIA - École normale supérieure de Lyon - ENS Lyon - Institut National des Sciences Appliquées de Lyon - Université Claude Bernard - Lyon I - Ecole Normale Supérieure Lettres et Sciences Humaines - Université Joseph Fourier - Grenoble I - CNRS - IRD); Florence Goffette-Nagot (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Pablo Jensen (Phys-ENS - Laboratoire de Physique de l'ENS Lyon - CNRS : UMR5672 - École normale supérieure de Lyon - ENS Lyon, IXXI - Institut Rhône-Alpin des systèmes complexes - INRIA - École normale supérieure de Lyon - ENS Lyon - Institut National des Sciences Appliquées de Lyon - Université Claude Bernard - Lyon I - Ecole Normale Supérieure Lettres et Sciences Humaines - Université Joseph Fourier - Grenoble I - CNRS - IRD, LET - Laboratoire d'économie des transports - CNRS : UMR5593 - Université Lumière - Lyon II - Ecole Nationale des Travaux Publics de l'Etat)
    Abstract: We propose an analytical resolution of Schelling segregation model for a general class of utility functions. Using evolutionary game theory, we provide conditions under which a potential function, which characterizes the global configuration of the city and is maximized in the stationary state, exists. We use this potential function to analyze the outcome of the model for three utility functions corresponding to different degrees of preference for mixed neighborhoods. Schelling original utility function is shown to drive segregation at the expense of collective utility. If agents have a strict preference for mixed neighborhoods but still prefer being in the majority versus in the minority, the model converges to perfectly segregated configurations, which clearly diverge from the social optimum. Departing from earlier literature, these conclusions are based on analytical results. These results pave the way to the analysis of many structures of preferences, for instance those based on empirical findings concerning racial preferences. As a by-product, our analysis builds a bridge between Schelling model and the Duncan and Duncan segregation index.
    Keywords: Residential segregation ; Schelling ; dynamic model ; potential function ; social preferences
    Date: 2010
  7. By: Raphaël Giraud (CRESE - Centre de REcherches sur les Stratégies Economiques - Université de Franche-Comté : EA); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We argue, in the spirit of some of Jean-Yves Jaffray's work, that explicitly incorporating the information, however imprecise, available to the decision maker is relevant, feasible, and fruitful. In particular, we show that it can lead us to know whether the decision maker has wrong beliefs and whether it matters or not, that it makes it possible to better model and analyze how the decision maker takes into account new information, even when this information is not an event and finally that it is crucial when attempting to identify and measure the decision maker's attitude toward imprecise information.
    Keywords: Decision under uncertainy ; Objective Information ; Belief Formation ; Methodology of Decision Theory
    Date: 2010
  8. By: Orazio Attansio; Abigail Barr; Juan Camilo Cardenas; Garance Genicot; Costas Mehgir
    Abstract: Using date from a field experiment conducted in seventy Colombian municipalities, we investigate who pools risk with whom when risk pooling arrangements are not formally enforced. We explore the roles played by risk attitudes and network connections both theoretically and empirically. We find that pairs of participants who share a bond of friendship or kinship are more likely to (1) join the same risk pooling group and to (2) group assortatively with respect to risk attitudes. Also, consistent with our theoretical finding that when there is a problem of trust the process of pooling assortativley with respect to risk preferences is perturbed, we find (3) only weak evidence of such assorting among unfamiliar individuals.
    Keywords: Field experiment; risk sharing; social sanctions; Insurance; Group formation: matching.
    JEL: C93 D71 D81 O12
    Date: 2009

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