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on Utility Models and Prospect Theory |
| By: | James Andreoni (University of California - San Diego); William T. Harbaugh (University of Oregon) |
| Abstract: | Experimental work on preferences over risk has typically considered choices over a small number of discrete options, some of which involve no risk. Such experiments often demonstrate contradictions of standard expected utility theory. We reconsider this literature with a new preference elicitation device that allows a continuous choice space over only risky options. Our analysis assumes only that preferences depend on the probability p and prize x; U = u(p; x): We then allow subjects to choose p and x continuously on a linear budget constraint, r1p + r2x = m, so that all prospects with a nonzero expected value are risky. We test five of the most importantly debated questions about risk preferences: rationality, prospect theory asymmetry, the independence axiom, probability weighting, and constant relative risk aversion. Overall, we find that the expected utility model does unexpectedly well. |
| Keywords: | expected utility |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2010-14&r=upt |
| By: | Li, Jinlu |
| Abstract: | In this paper, I adopt an economic equilibrium model utilizing the framework introduced by Mehra and Prescott (1985) when they presented the equity premium puzzle. This model, in the long run and with respect to stationary probabilities, produces results that match the sample values derived from the U.S. economy between 1889 and 1978 as illustrated by the studies performed by Grossman and Shiller (1981), which includes the expected average, standard deviation, and first-order serial correlation of the growth rate of per capita real consumption and the expected returns and standard deviation of equity, risk-free security, and risk premium for equity. Therefore, this model solves the equity premium and volatility puzzles. I also explore the reasons why the equity premium puzzle was caused. |
| Keywords: | The constant relative risk aversion class utility function; risk premium; time discount factor; parameters defining preferences; parameters defining technologies; the equity premium and volatility puzzles. |
| JEL: | C02 C15 E01 |
| Date: | 2010–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26833&r=upt |
| By: | Benjamin Eden (Department of Economics, Vanderbilt University) |
| Abstract: | The paper investigates the role of the Intertemporal Elasticity of Substitution () in determining the equity premium. This is done in an overlapping generations economy populated by agents that live for 2 periods and maximize a Kihlstrom-Mirman expected utility function. The equity premium depends both on the demand for smoothing as measured by the inverse of and on risk aversion but the first seems to play a more important role. The paper also attempts to understand the difference between the predictions of a 2 periods Kihlstrom-Mirman expected utility and the predictions of a 2 periods Epstein-Zin-Weil utility. |
| Keywords: | Fluctuations Aversion, Risk Aversion, Asset Prices, Equity Premium Puzzle, Risk Free Rate Puzzle |
| JEL: | D11 D81 D91 G12 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:1011&r=upt |
| By: | Francisco J. Vazquez; Richard Watt |
| Abstract: | In this note we show that the measure of intensity of downside risk aversion proposed recently by Crainich and Eeckhoudt (2007) cannot be guaranteed to exist. We do this by means of an example in which the existence of the measure depends upon the values of the parameters in the problem. |
| Keywords: | risk aversion, prudence, downside risk |
| JEL: | D81 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:24-2010&r=upt |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | A lot of empirical and behavioral studies underline the idea of a non-flat term structure of subjective interest rates with a decreasing slope. Using an empirical test, this paper aims at identifying in individual behaviors whether agents see their psychological value of time decreasing or not. We show that the subjective interest rate follows a negatively sloped term structure. It can be parameterized using two variables, one specifying the instantaneous time preference, the other characterizing the slope of the term structure. A trade-off law called “balancing pressure law” is identified between these two parameters. We show that the term structure of psychological rates depends strongly on gender, but appears not to be linked with life expectancy. We also question the cross relationship between risk aversion and time preference. From a theoretical point of view, these two variables stand as two different and independent dimensions of choice. However, empirically, both time preference attitude and slope seem directly influenced by risk attitude. |
| Keywords: | hyperbolic discounting, time preference, behavioral economics, psychological time value, risk aversion |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00536910_v1&r=upt |
| By: | David Dillenberger; Kareen Rozen |
| Date: | 2010–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000321&r=upt |
| By: | S.Shankar; C.J. O’Donnell (CEPA - School of Economics, The University of Queensland); John Quiggin (CEPA - School of Economics, The University of Queensland) |
| Abstract: | In this article we model production technology in a state-contingent framework. Our model analyzes production under uncertainty without regard to the nature of producer risk preferences. In our model producers? risk preferences are captured by the risk-neutral probabilities they assign to the different states of nature. Using a state-general state-contingent specification of technology we show that rational producers who encounter the same stochastic technology can make significantly different production choices. Further, we develop an econometric methodology to estimate the risk-neutral probabilities and the parameters of stochastic technology when there are two states of nature and only one of which is observed. Finally, we simulate data based on our state-general state-contingent specification of technology. Biased estimates of the technology parameters are obtained when we apply conventional ordinary least squares (OLS) estimator on the simulated data. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqcepa:51&r=upt |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Jessica Fouilloux (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen) |
| Abstract: | This paper proposes a consumption-based model that accounts for term premiums of the nominal term structure of interest rates. The driving force behind the model is the looking at the ex ante term premium. Nominal term premiums depend on the volatility processes of real consumption and inflation. When calibrated to US data on interest rates, consumption and inflation, the model accounts for the C-CAPM expectations puzzle. Risk aversion coefficients around 6 are evidenced. The hypothesis of non-constant subjective discount rates is envisaged but successfully validated. |
| Keywords: | C-CAPM, term structure of interest rates, term premium, risk aversion, subjective discount factor |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00536924_v1&r=upt |
| By: | Ole Peters |
| Abstract: | A resolution of the St. Petersburg paradox is presented. In contrast to the standard resolution, utility is not required. Instead, the time-average performance of the lottery is computed. The final result can be phrased mathematically identically to Daniel Bernoulli's resolution, which uses logarithmic utility, but is derived using a conceptually different argument. The advantage of the time resolution is the elimination of arbitrary utility functions. |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1011.4404&r=upt |
| By: | Kroll, Eike B.; Müller, Holger; Vogt, Bodo |
| Abstract: | This study investigates context effects in general and the compromise effect in particular. It is argued that earlier research in this area lacks realism, a shortcoming that is a major drawback to research conclusions and stated management implications. The importance of this issue is stressed by previous research showing that behavioral anomalies found in hypothetical experimental settings tend to be significantly reduced when real payoff mechanisms are introduced. Therefore, to validate the compromise effect, an enhanced design is presented with participants making binding purchase decisions in the laboratory. We find that the compromise effect holds for real purchase decisions, and therefore is validated, and is not an artificial effect in surveys on hypothetical buying decisions. While conclusions and implications for marketing managers, derived in previous work assume that context effects hold for real market decisions, the results created by this enhanced design close this gap in the literature. -- |
| Keywords: | decision-making,anomalies,irrelevant alternatives,context effects |
| JEL: | D8 C9 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:12&r=upt |
| By: | Tang, Qianfeng |
| Abstract: | In game theory, there is a basic methodological dichotomy between Harsanyi's "game-theoretic" view and Aumann's "Bayesian decision-theoretic" view of the world. We follow the game-theoretic view, propose and study interim partially correlated rationalizability for games with incomplete information. We argue that the distinction between this solution concept and the interim correlated rationalizability studied by Dekel, Fudenberg and Morris (2007) is fundamental, in that the latter implicitly follows Aumann's Bayesian view. Our main result shows that two types provide the same prediction in interim partially correlated rationalizability if and only if they have the same infinite hierarchy of beliefs over conditional beliefs. We also establish an equivalence result between this solution concept and the Bayesian solution--a notion of correlated equilibrium proposed by Forges (1993). |
| Keywords: | Games with incomplete information; Rationalizability; Common knowledge; Hierarchies of beliefs. |
| JEL: | C70 C72 |
| Date: | 2010–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26810&r=upt |