nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2010‒11‒13
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Measuring Risk Aversion Model-Independently By Maier, Johannes; Rüger, Maximilian
  2. Risk Attitudes and Well-Being in Latin America By Cardenas, Juan Camilo; Carpenter, Jeffrey P.
  3. Overconfidence, risk aversion and (economic) behavior of individual traders in experimental asset markets By Michailova, Julija
  4. A within-subject analysis of other-regarding preferences By Blanco, Mariana; Engelmann, Dirk; Normann, Hans-Theo
  5. Testing construct validity of verbal versus numerical measures of preference uncertainty in contingent valuation By Akter, Sonia; Bennett, Jeff
  6. Macro expectations, aggregate uncertainty, and expected term premia By Dick, Christian D.; Schmeling, Maik; Schrimpf, Andreas
  7. Compressed environments: Unbounded optimizers should sometimes ignore information By Berg, Nathan; Hoffrage, Ulrich

  1. By: Maier, Johannes; Rüger, Maximilian
    Abstract: We propose a new method to elicit individuals' risk preferences. Similar to Holt and Laury (2002), we use a simple multiple price-list format. However, our method is based on a general notion of increasing risk, which allows classifying individuals as more or less risk-averse without assuming a specic utility framework. In a laboratory experiment we compare both methods. Each classies individuals almost identically as risk-averse, -neutral, or -seeking. However, classications of individuals as more or less risk-averse dier substantially. Moreover, our approach yields higher measures of risk aversion, and only with our method these measures are robust toward increasing stakes.
    Keywords: Risk Aversion; Multiple Price-List; Elicitation; Laboratory Experiment; Holt and Laury Method; Mean Preserving Spreads; Non-EUT; Increasing Risk
    JEL: D81 C91
    Date: 2010–10–11
  2. By: Cardenas, Juan Camilo (Universidad de los Andes); Carpenter, Jeffrey P. (Middlebury College)
    Abstract: A common premise in both the theoretical and policy literatures on development is that people remain poor because they are too impatient to save and too risk averse to take the sort of chances needed to accumulate wealth. The empirical literature, however, suggests that this assumption is far from proven. We report on field experiments designed to address many of the issues confounding previous analyses of the links between risk preferences and well-being. Our sample includes more than 3,000 participants who were drawn representatively from six Latin American cities: Bogotá, Buenos Aires, Caracas, Lima, Montevideo, San José. In addition to the experiment which reveals interesting cross-country differences, participants completed an extensive survey that provides data on a variety of well-being indicators and a number of important controls. Focusing on risk preferences, we find little evidence of robust links between risk aversion and well-being. However, when we analyze the results of three treatments designed to better reflect common choices made under uncertainty, we see that these, more subtle, instruments correlate better with well-being, even after controlling for a variety of other important factors like the accumulation of human capital and access to credit.
    Keywords: risk aversion, ambiguity aversion, loss aversion, risk pooling, well-being, Latin America
    JEL: C91 C93 D81 O12
    Date: 2010–10
  3. By: Michailova, Julija
    Abstract: In this paper influence of behavioral factors (overconfidence and risk aversion) on financial decision making of economic subjects is analyzed. For this purpose two kinds of experiments were conducted: asset market and risk aversion experiments. In conducted asset market sessions subjects, based on their pre-experimental overconfidence scores, were assigned to two types of markets: the least overconfident ones formed five “rational” markets and the most overconfident ones formed five “overconfident” markets. Data collected from ten experimental sessions revealed that individual performance and trade activity were overconfidence dependent. Even small variations in miscalibration among players of the same “type”, comprising each of the asset markets, were sufficient to cause this effect. In the second part of experiment, post hoc assessment of risk aversion was implemented in a sample of former participants of the asset market experiment (32 persons). The presented evidence suggests that risk aversion was not among the factors that had influence on individual engagement in trade activity or performance. It was concluded that in the sample, for which risk aversion measurements were obtained, experimental market outcomes were overconfidence and not risk aversion driven.
    Keywords: overconfidence; individual behavior; experiment.
    JEL: D81 G11 C90 C91
    Date: 2010
  4. By: Blanco, Mariana; Engelmann, Dirk; Normann, Hans-Theo
    Abstract: We assess the predictive power of a model of other-regarding preferences - inequality aversion - using a within-subjects design. We run four different experiments (ultimatum game, dictator game, sequential-move prisoners' dilemma and public-good game) with the same sample of subjects. We elicit two parameters of inequality aversion to test several hypotheses across games. We find that within-subject tests can differ markedly from aggregate-level analyses. Inequality-aversion has predictive power at the aggregate level but performs less well at the individual level. The model seems to capture various behavioral motives in different games but the correlation of these motives is low within subjects. --
    Keywords: behavioral economics,experimental economics,inequality aversion,otherregarding preferences
    JEL: C72 C91
    Date: 2010
  5. By: Akter, Sonia; Bennett, Jeff
    Abstract: The numerical certainty scale (NCS) and polychotomous choice (PC) methods are two widely used techniques for measuring preference uncertainty in contingent valuation (CV) studies. The NCS follows a numerical scale and the PC is based on a verbal scale. This report presents results of two experiments that use these preference uncertainty measurement techniques. The first experiment was designed to compare and contrast the uncertainty scores obtained from the NCS and the PC method. The second experiment was conducted to test a preference uncertainty measurement scale that combines verbal expressions with numerical and graphical interpretations: a composite certainty scale (CCS). The construct validity of the certainty scores obtained from these three techniques was tested by estimating three separate ordered probit regression models. The results of the study can be summarised in three key findings. First, the PC method generates a higher proportion of âyesâ responses than the conventional dichotomous choice elicitation format. Second, the CCS method generates a significantly higher proportion of certain responses than the NCS and the PC methods. Finally, the NCS method performs poorly in terms of construct validity. Overall, the verbal measures perform better than the numerical measure. The CCS is a promising method to measure preference uncertainty in CV studies. To better understand its strengths and weaknesses however, further empirical applications are needed.
    Keywords: preference uncertainty, contingent valuation, numerical certainty scale, polychotomous choice method, composite certainty scale, climate change, Australia., Environmental Economics and Policy, Research Methods/ Statistical Methods, Q51, Q54,
    Date: 2010–01
  6. By: Dick, Christian D.; Schmeling, Maik; Schrimpf, Andreas
    Abstract: Based on individual expectations from the Survey of Professional Forecasters, we construct a real-time proxy for expected term premium changes on long-term bonds. We empirically investigate the relation of these bond term premium expectations with expectations about key macroeconomic variables as well as aggregate macroeconomic uncertainty at the level of individual forecasters. We find that expected term premia are (i) time-varying and reasonably persistent, (ii) strongly related to expectations about future output growth, and (iii) positively affected by uncertainty about future output growth and inflation rates. Expectations about real macroeconomic variables seem to matter more than expectations about nominal factors. Additional findings on term structure factors suggest that the level and slope factor capture information related to uncertainty about real and nominal macroeconomic prospects, and that curvature is related to subjective term premium expectations themselves. Finally, an aggregate measure of forecasters' term premium expectations has predictive power for bond excess returns over horizons of up to one year. --
    JEL: E43 E44 G12
    Date: 2010
  7. By: Berg, Nathan; Hoffrage, Ulrich
    Abstract: Given free information and unlimited processing power, should decision algorithms use as much information as possible? A formal model of the decision making environment is developed to address this question and provide conditions under which informationally frugal algorithms, without any information or processing costs whatsoever, are optimal. One cause of compression that allows optimal algorithms to rationally ignore information is inverse movement of payoffs and probabilities (e.g., high payoffs occur with low probably and low payoffs occur with high probability). If inversely related payoffs and probabilities cancel out, then predictors that correlate with payoffs and consequently condition the probabilities associated with different payoffs will drop out of the expected-payoff objective function, severing the link between information and optimal action rules. Stochastic payoff processes in which rational ignoring occurs are referred to as compressed environments, because optimal action depends on a reduced-dimension subset of the environmental parameters. This paper considers benefits and limitations of economic models versus other methods for studying links between environmental structure and the real-world success of simple decision procedures. Different methods converge on the normative proposition of ecological rationality, as opposed to axiomatic rationality based on informational efficiency and internal consistency axioms, as a superior framework for comparing the effectiveness of decision strategies and prescribing decision algorithms in application.
    Keywords: Ecological rationality; Bounded rationality; Frugality; Simplicity
    Date: 2010

This nep-upt issue is ©2010 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.