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on Utility Models and Prospect Theory |
| By: | Giuseppe Attanasi; Aldo Montesano |
| Abstract: | Research on integrative modeling has gained considerable attention In this paper ambiguity aversion is measured through the maximum price the decision maker is willing to pay in order to know the probability of an event. Two comparative problems are examined in which the decision maker faces an act: in one case buying information implies playing a lottery, while in the other case buying information gives also the option to avoid playing the lottery. In both decision settings, relying on Choquet expected utility model, we study how the decision maker’s risk and ambiguity attitudes affect the reservation price for information. These effects are analyzed for different levels of ambiguity of the act. |
| Keywords: | Ambiguity Aversion; Choquet Expected Utility; Information about probabilities. |
| JEL: | D81 D83 C91 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:031&r=upt |
| By: | Tobias Regner (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Nicole S. Harth (International Graduate College, Friedrich Schiller University, Jena) |
| Abstract: | Intentions-based models of social preferences use the framework of psychological games and incorporate higher order beliefs and actions into the utility function. We test the robustness of two types of intentions-based models (guilt aversion and reciprocity). In addition to incentivised elicitation of first- and second-order action beliefs, we assess participants' sensitivity to feel guilt, and their attitude towards acting reciprocal. The data confirm the predictions of intentions-based models. Both second-order beliefs and the weighting factor that depends on a participant's sensitivity to guilt/reciprocity are relevant for the decisions taken. Second-order beliefs appear to have an inverse U-shaped effect on the amount returned. |
| Keywords: | social preferences, other-regarding behaviour, experiments, trust game, guilt aversion, beliefs, psychological game theory, emotions |
| JEL: | C91 D84 |
| Date: | 2010–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-072&r=upt |
| By: | Thibault Gajdos (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CERSES - Centre de recherche sens, ethique, société - CNRS : UMR8137 - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Jean-Christophe Vergnaud (CERSES - Centre de recherche sens, ethique, société - CNRS : UMR8137 - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | The most usual procedure when facing decisions in complex settings consists in consulting experts, aggregating the information they provide, and deciding on the basis of this aggregated information. We argue that such a procedure entails a substantial loss, insofar as it precludes the possibility to take into account simultaneously the decision maker's attitude towards conflict among experts and her attitude towards imprecision of information. We propose to consider directly how a decision maker behaves when using information coming from several sources. We give an axiomatic foundation for a decision criterion that allows to distinguish on a behavioral basis the decision maker's attitude towards imprecision and towards conflict. |
| Keywords: | Decisions with multiple sources of information. Conflict aversion. Imprecision aversion. |
| Date: | 2009–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00443075_v1&r=upt |
| By: | Eric Danan (THEMA); Thibault Gajdos (Centre d'Economie de la Sorbonne, Ecole Polytechnique, CERSES); Jean-Marc Tallon (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We analyze the aggregation problem without the assumption that individuals and society have fully determined and observable preferences. More precisely, we endow individuals ans society with sets of possible von Neumann-Morgenstern utility functions over lotteries. We generalize the classical neutrality assumption to this setting and characterize the class of neutral social welfare function. This class turns out to be considerably broader for indeterminate than for determinate utilities, where it basically reduces to utilitarianism. In particular, aggregation rules may differ by the relationship between individual and social indeterminacy. We characterize several subclasses of neutral aggregation rules and show that utilitarian rules are those that yield the least indeterminate social utilities, although they still fail to systematically yield a determinate social utility. |
| Keywords: | Aggregation, vNM utility, indeterminacy, neutrality, utilitarianism. |
| JEL: | D71 D81 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:10068&r=upt |
| By: | Valeria Faralla; Francesca Benuzzi; Fausta Lui; Patrizia Baraldi; Paolo Nichelli; Nicola Dimitri |
| Abstract: | Event-related functional magnetic resonance imaging was used to investigate the neural mechanisms underlying intertemporal preference for symmetric gains and losses in certain conditions, by asking subjects to choose between two gains or two losses available at different points in time. Our data suggest that a common system is activated when an immediate reward/punishment is available, irrespectively of the impulsive /reflective behaviour performed by the individual. |
| Keywords: | intertemporal preferences; gains; losses; certainty; intertemporal preferences, gains, losses, certainty; sign effect; functional magnetic resonance imaging; decision-making . |
| JEL: | D87 D90 D91 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:033&r=upt |
| By: | Cary Deck (University of Arkansas and Economic Science Institute); Jungmin Lee (Florida International University); Javier Reyes (University of Arkansas) |
| Abstract: | Researchers have found that an individual’s risk attitude is not stable across elicitation methods. Results reported by Deck et al. (2009) suggest that personality may help explain the apparent inconsistency, offering support to Borghans et al.’s (2008) argument that economists should consider a multi-domain approach to measuring risk attitudes. This paper uses laboratory methods to compare risk attitudes as measured by the Holt and Laury (2002) procedure under two different frames. We find that, as in Deck et al. (2009), one’s willingness to take financial risks (as measured by Weber et al. 2002) significantly affects behavior; however the effect is significantly greater when the task is framed as a financial decision. This paper also asks whether personality can explain the well documented behavioral difference between first price and Dutch auctions. While one’s gambling attitude (as measured by Weber et al. 2002) affects bidding behavior, it does not do so differentially between auction formats. |
| Keywords: | Risk Attitudes, Personality, Auctions, Framing Effects, Laboratory Experiments |
| JEL: | C9 D4 D8 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:10-17&r=upt |
| By: | Pessali, Huascar; Berger, Bruno |
| Abstract: | For many decades over the 20th Century, the mainstream of economics adopted a normative and axiomatic theory of individual behavior in which maximizing procedures were carried out by rationally unbounded agents. This status has been challenged on many grounds and alternative views from fields like psychology have found a way into the core of economics research frontier. Prospect theory, developed by psychologists Daniel Kahneman and Amos Tversky since the 1970s, has provided a more empirical, inductive and descriptive theory of decision making. It has made significant inroads into mainstream microeconomics, shaking the habits of some of its practitioners. This paper first takes stock of its main developments and then uses a Lakatosian framework to draw out its negative and positive heuristics. In what follows, its heuristics are compared to those of traditional rational decision-making theories. The differences between them are highlighted, pointing to changes in the mainstream of the profession and to new opportunities for research. |
| Keywords: | decision making; prospect theory; behavioral economics; experimental economics; expected utility theory. |
| JEL: | B21 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26104&r=upt |
| By: | Miguel A. Espinosa; Juan D. Prada-Sarmiento |
| Abstract: | Using a homogeneous and continuous utility function that represents a household's preferences, this paper proves explicit identities between most of the different objects that arise from the utility maximization and the expenditure minimization problems. The paper also outlines the homogeneity properties of each object. Finally, we show explicit algebraic ways to go from the indirect utility function to the expenditure function and from the Marshallian demand to the Hicksian demand and vice versa, without the need of any other function, thus simplifying the integrability problem avoiding the use of differential equations. |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:007611&r=upt |
| By: | Nicholas Westray; Harry Zheng |
| Abstract: | We maximize the expected utility of terminal wealth in an incomplete market where there are cone constraints on the investor's portfolio process and the utility function is not assumed to be strictly concave or differentiable. We establish the existence of the optimal solutions to the primal and dual problems and their dual relationship. We simplify the present proofs in this area and extend the existing duality theory to the constrained nonsmooth setting. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1010.4055&r=upt |
| By: | Bada, Oualid; Kneip, Alois |
| Abstract: | We use a panel cointegration model with multiple time- varying individual effects to control for the missing factors in the credit spread puzzle. Our model specification enables as to capture the unobserved dynamics of the systematic risk premia in the bond market. In order to estimate the dimensionality of the hidden risk factors jointly with the model parameters, we rely on a modified version of the iterated least squares method proposed by Bai, Kao, and Ng (2009). Our result confirms the presence of four common risk components affecting the U.S. corporate bonds during the period between September 2006 and March 2008. However, one single risk factor is sufficient to describe the data for all time periods prior to mid July 2007 when the subprime crisis was detected in the financial market. The dimensionality of the unobserved risk components therefore seems to reflect the degree of difficulty to diversify the individual bond risks. |
| Keywords: | Panel Data Model; Factor Analysis; Credit Spread; Systematic Risk Premium; |
| JEL: | C33 |
| Date: | 2010–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26006&r=upt |
| By: | Annamaria Menichini (CSEF, Università di Salerno); Giovanni Immordino (Università di Salerno and CSEF); Maria Grazia Romano (University of Salerno and CSEF) |
| Abstract: | The paper analyses, within a moral hazard scenario, a contract between an agent with anticipatory emotions and a principal who responds strategically to those emotions. The agent receives a private signal on the profitability of the task he was hired for. If the signal is informative about the return from effort, the agent would benefit from knowing accurate news. However, if the agent derives utility from the anticipation of his final payoff, the suppression of a bad signal may induce a positive interim emotional effect. We show that it may be impossible to achieve the first-best, even though the risk-neutral parties are symmetrically informed at the contracting stage and complete contracts can be written. |
| Keywords: | Hidden action, anticipatory utility. |
| JEL: | D86 |
| Date: | 2010–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:262&r=upt |
| By: | Erhan Bayraktar; Ross Kravitz |
| Abstract: | In this paper we extend the stability results of [4]}. Our utility maximization problem is defined as an essential supremum of conditional expectations of the terminal values of wealth processes, conditioned on the filtration at the stopping time $\tau$. The stability result, in particular, implies that in the framework of [4], the optimal wealth at any given stopping time is stable with respect to changes in the Sharpe ratio and initial wealth. To establish our results, we extend the classical results of convex analysis to maps from $L^0$ to $L^0$. The notion of convex compactness introduced in [7] plays an important role in our analysis. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1010.4322&r=upt |
| By: | Judith Avrahami; Yaakov Kareev |
| Abstract: | This article explores the extent to which decision behavior is shaped by short-lived reactions to the outcome of the most recent decision. We inspected repeated decision-making behavior in two versions of each of two decision-making tasks, an individual task and a strategic one. By regressing behavior onto the outcomes of recent decisions, we found that the upcoming decision was well predicted by the most recent outcome alone, with the tendency to repeat a previous action being affected both by its actual outcome and by the outcomes of actions not taken. Because the goodness of predictions based on the most recent outcome did not diminish as participants gained experience with the task, we conclude that repeated decisions are continuously affected by impulsive reactions. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp552&r=upt |
| By: | Tigran Melkonyan (Department of Resource Economics, University of Nevada, Reno); Mark Pingle (Department of Economics, University of Nevada, Reno) |
| Abstract: | Using basic decision-theory, we construct a theory of agnosticism, where agnosticism is defined as choosing not to choose a religion. The theory indicates agnosticism can be supported as a rational choice if (a) adopting agnosticism provides in-life benefits relative to any religion, (b) the perceived payoff for agnosticism after death is not too much less than any religion, (c) no religion has a high perceived likelihood of truth, (d) probability of death is neither too high nor too low, or (e) it is less costly to switch from agnosticism to a given religion than from one religion to another, while at the same time there is a reasonable likelihood an informative signal may be received in life as to the truth of various religions. |
| Keywords: | Agnosticism; Decision theory; Religion; Procrastination; Signal; Uncertainty |
| JEL: | C44 D81 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:unr:wpaper:10-005&r=upt |