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on Utility Models and Prospect Theory |
| By: | Antoine Bommier (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Arnold Chassagnon (Paris School of Economics and Paris-Dauphine University); François Le Grand (EMLyon Business School) |
| 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 [15], Selden [26], Epstein and Zin [9] and Quiggin [24] 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: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:10-134&r=upt |
| By: | Thomas Epper; Helga Fehr-Duda; Adrian Bruhin |
| Abstract: | A large body of experimental research has demonstrated that, on average, people violate the axioms of expected utility theory as well as of discounted utility theory. In particular, aggregate behavior is best characterized by probability distortions and hyperbolic discounting. But is it the same people who are prone to these behaviors? Based on an experiment with salient monetary incentives we demonstrate that there is a strong and significant relationship between greater departures from linear probability weighting and the degree of decreasing discount rates at the level of individual behavior. We argue that this relationship can be rationalized by the uncertainty inherent in any future event, linking discounting behavior directly to risk preferences. Consequently, decreasing discount rates may be generated by people's proneness to probability distortions. |
| Keywords: | Time preferences, risk preferences, hyperbolic discounting, probability weighting, institutionally generated uncertainty |
| JEL: | D01 D81 D91 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:510&r=upt |
| By: | Gerasimou, Georgios |
| Abstract: | This paper proposes and characterises two preference-based choice rules that allow the decision maker to choose nothing if the criteria associated with them are satisfied by no feasible alternative. Strict preferences are primitive in the first rule and weak preferences in the second. Each of them includes the corresponding utility-maximisation theory of rational choice as a special case. The first one explains changes in the magnitude of context effects observed in experiments that allow for indecision. The second offers one explanation of experimental findings suggesting that choice is more likely to be made from small rather than from large sets. The general conclusion in both cases is that an individual conforms to meaningful and testable principles of choice consistency whenever assumed to be occasionally indecisive. |
| Keywords: | Rationality; indecision; incomplete preferences; choice rules |
| JEL: | D11 D01 |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25481&r=upt |
| By: | Aurora García-Gallego (GLOBE-Economics Dpt., U. Granada & LEE-Ec. Dpt., U. Jaume I (Spain)); Nikolaos Georgantzís (GLOBE-Economics Dpt., Universidad de Granada (Spain) & BELIS, Murat Sertel Center for Advanced Economic Studies, Istanbul Bilgi University (Turkey)); Ainhoa Jaramillo-Gutiérrez (Economics & Finance Dpt., Universidad Castilla la Mancha (Spain)); Melanie Parravano (LEE-Economics Dpt., Universitat Jaume I (Spain)) |
| Abstract: | We propose a simple task for the elicitation of risk attitudes, initially used in Sabater-Grande and Georgantzís (2002) [SGG], capturing two dimensions of individual decision making: subjects’ average willingness to choose risky projects and their sensitivity towards variations in the return to risk. We report results from a large dataset obtained from the test and discuss regularities and the desirability of its bi-dimensionality when used to explain behaviour in other contexts. |
| Keywords: | Psychometric Tests, Decision-making; Lotteries; Risk aversion. |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:10/07&r=upt |
| By: | Heineck, Guido (IAB, Nürnberg); Wölfel, Oliver (IAB, Nürnberg) |
| Abstract: | It is well known that individuals' risk attitudes are related to behavioral outcomes such as smoking, portfolio decisions, and also educational attainment, but there is barely any evidence on whether parental risk attitudes affect the educational attainment of dependent children. We add to this literature and examine children's secondary school track choice in Germany where tracking occurs at age ten and has a strong binding character. Our results indicate no consistent patterns for paternal risk preferences but a strong negative impact of maternal risk aversion on children's enrollment in upper secondary school. |
| Keywords: | educational choice, risk attitudes, SOEP |
| JEL: | I21 J24 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5197&r=upt |
| By: | Sudhir A. Shah |
| Abstract: | Pratt (1964) and Yaari (1969) contain the classical results pertaining to the equivalence of various notions of comparative risk aversion of von Neumann- Morgenstern utilities in the setting with real-valued outcomes. They have obtained analogues of the classical results in the setting with outcomes in ordered topological vector spaces when differentiability is not required, and in the setting with out comes in ordered Hilbert spaces when differentiability is required, as is the case when we work with a vector-valued generalized notion of an Arrow-Pratt coefficient. [Working Paper No. 149] |
| Keywords: | Comparative risk aversion,vector space of outcomes, acceptance set,vector-valued risk premia,vector- valued Arrow-Prattcoefficient, Pettis integral,ordered topological vector spaces, ordered Hilbert spaces |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2907&r=upt |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University); Satoru Takahashi (Dept. of Economics, Princeton University) |
| Abstract: | A universal type space of interdependent expected utility preference types is constructed from higher-order preference hierarchies describing (i) an agent's (unconditional) preferences over a lottery space; (ii) the agent's preference over Anscombe-Aumann acts conditional on the unconditional preferences; and so on. Two types are said to be strategically indistinguishable if they have an equilibrium action in common in any mechanism that they play. We show that two types are strategically indistinguishable if and only if they have the same preference hierarchy. We examine how this result extends to alternative solution concepts and strategic relations between types. |
| Keywords: | Interdependent preferences, Higher-order preference hierarchy, Universal type space, Strategic distinguishability |
| JEL: | C79 D82 D83 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1772&r=upt |
| By: | Martin M. Andreasen (Bank of England and CREATES) |
| Abstract: | This paper studies how non-Gaussian shocks affect risk premia in DSGE models approximated to second and third order. Based on an extension of the results in Schmitt-Grohé & Uribe (2004) to third order, we derive propositions for how rare disasters, stochastic volatility, and GARCH affect any risk premia in a wide class of DSGE models. To quantify these effects, we then set up a standard New Keynesian DSGE model where total factor productivity includes rare disasters, stochastic volatility, and GARCH. We ?find that rare disasters increase the mean level of the 10-year nominal term premium, whereas a key effect of stochastic volatility and GARCH is an increase in the variability of this premium. |
| Keywords: | Epstain-Zin-Weil preferences, GARCH, rare disasters, risk premia, stochastic volatility. |
| JEL: | C68 E30 E43 E44 |
| Date: | 2010–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2010-63&r=upt |
| By: | Jorge Alcalde-Unzu; Marc Vorsatz |
| Abstract: | In this paper, we suggest new ways of how to measure the similarity of preferences in a group of individuals. For simplicity, we refer to this as the cohesiveness (of preferences). We propose axioms a cohesiveness measure should satisfy and show that these properties fully characterize a family of measures. According to it, the similarities between each pair of objects in a preference profile -calculated as the proportion margin by which one objects wins against the other in a pairwise comparison- are aggregated by a weighted mean. The weight of each pair of objects depends on their importance at the social level |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2010-23&r=upt |
| By: | Li, Wu |
| Abstract: | The equilibrium analyses under the classical growth framework mainly concern production processes so far and the utility-maximization of consumers is not considered sufficiently. Treating a consumer as a producer of labor or land-use right etc. with a utility parameter, this paper presents equilibrium formulas taking account of the utility-maximization of consumers, which may facilitate the analysis of dynamic general equilibrium involving both profit-maximizing firms and utility-maximizing consumers under the classical growth framework. For concreteness, some numerical examples with Cobb-Douglas production and utility functions are utilized to illustrate the method of the equilibrium analysis involving utility-maximizing consumers. |
| Keywords: | dynamic general equilibrium; utility; Sraffian system; von Neumann growth model; land rent |
| JEL: | B51 Q24 D58 C67 |
| Date: | 2010–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25540&r=upt |