nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2010‒12‒04
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Joint measurement of risk aversion, prudence and temperance By Sebastian Ebert; Daniel Wiesen
  2. On the rationalizability of observed consumers’ choices when preferences depend on budget sets and (potentially) on anything else By Ennio Bilancini
  3. Who should be called to the lab? A comprehensive comparison of students and non-students in classic experimental games By Michèle Belot; Raymond Duch; Luis Miller
  4. Risk Aversion and the Value of Risk to Life. By Bommier, Antoine; Villeneuve, Bertrand
  5. Equity Risk Premium and Time Horizon : What do the U.S. Secular Data Say ? By Georges Prat
  6. Determinants of the Foreign Exchange Risk Premium in Gulf Cooperation Council Countries By Tigran Poghosyan
  7. Context Effects as Customer Reaction on Delisting of Brands By Nicole Wiebach; Lutz Hildebrandt
  8. Decision Rules for Experts with Opposing Interests By Tymofiy Mylovanov; Andriy Zapechelnyuk
  9. Selecting random parameters in discrete choice experiment for environmental valuation: A simulation experiment. By Petr Mariel; Amaya De Ayala; David Hoyos; Sabah Abdullah

  1. By: Sebastian Ebert; Daniel Wiesen
    Abstract: We propose a method to measure the intensity of risk aversion, prudence (downside risk aversion) and temperance (outer risk aversion) in experiments. Higher-order risk compensations are defined within the proper risk apportionment model of Eeckhoudt and Schlesinger [American Economic Review, 96 (2006) 280] that are elicited using a multiple price list format. This approach is not based on expected utility theory. In our experiment we find evidence for risk aversion, prudence and temperance. Women demand higher risk compensations for all orders. The highest compensation is demanded for taking downside risk, not for being (second order) risk-loving. This highlights the importance of prudence when considering economic decisions under risk.
    Keywords: Decision making under risk, laboratory experiment, prudence, risk aversion, temperance, gender differences
    JEL: C91 D81
    Date: 2010–11
  2. By: Ennio Bilancini
    Abstract: We prove that defining consumers’ preferences over budget sets is both necessary and sufficient to make every fully informative and finite set of observed consumption choices rationalizable by a collection of preferences which are transitive, complete, and monotone with respect to own consumption. Our finding has two important theoretical consequences. First, assuming that preferences depend on budget sets is illegitimate under the scientific commitments of revealed preference theory. Second, as long as consumers’ preferences are not defined over budget sets, we can assume that preferences depend on observable objects other than own consumption without compromising the logical possibility to reject the model against observation. We however point out that, despite this logical possibility, in practice it can be almost impossible to reject a model where preferences are defined over objects that depend on budget sets. As an example of this we show that if preferences are defined over consumption choices of other individuals then rationalization fails only in cases of negligible practical interest.
    Keywords: Revealed Preferences, Budget Sets, Rational Preferences, Rationalizability
    JEL: B40 D11
    Date: 2010–11
  3. By: Michèle Belot; Raymond Duch (Centre for Experimental Social Sciences, Nuffield College, University of Oxford); Luis Miller
    Abstract: This study compares the behavior of students and non-students in a number of classic experimental games. We find that students are more likely to behave as homo-economicus agents than non-students in games involving other-regarding preferences (Dictator Game, Trust Game and Public Good Game). These differences persist even when controlling for demographics, cognitive ability and risk preferences. In games that do not engage other-regarding preferences (Beauty-contest and Second-price Auction) there is limited evidence of differences in behaviour between subject pools. In none of the five games is there evidence of significant differences in comprehension between students and non-students. Within subject analyses indicate that students are highly consistent in their other-regarding preferences while non-student subjects are inconsistent across other-regarding games. Our findings suggest that experiments using students will provide a lower bound estimate of other-regardedness in the general population while exaggerating the stability of other-regarding preferences.
    Keywords: lab experiments, convenience samples, other-regarding preferences, consistency
    JEL: C72 C81 C91
    Date: 2010–10
  4. By: Bommier, Antoine; Villeneuve, Bertrand
    Abstract: The standard literature on the value of life relies on Yaari’s (1965) model, which includes an implicit assumption of risk neutrality with respect to life duration. To overpass this limitation, we extend the theory to a simple variety of nonadditively separable preferences. The enlargement we propose is relevant for the evaluation of life-saving programs: current practice, we estimate, puts too little weight on mortality risk reduction of the young. Our correction exceeds in magnitude that introduced by the switch from the notion of number of lives saved to the notion of years of life saved.
    Keywords: Life Insurance; Lifecycle Behavior; Cost-Benefit Analysis; Value of Statistical Life;
    JEL: D91 D81 D61 J17 I18
    Date: 2010
  5. By: Georges Prat
    Abstract: An ex-ante equity risk premium is the difference between the expected return of a risky asset at time t for a given future time horizon and an equivalent maturity risk-free interest rate. Using annual US secular data from 1871 to 2008, this study aims to model simultaneously the measures and the explanations of ex-ante equity risk premia for two polar horizons: the one period ahead horizon (i.e. the "short term" premium) and the infinite time horizon (i.e. the "long term" premium). Expectations being represented by traditional adaptive processes, large disparities in the dynamics of the two premia are evidenced. According to the conditional CAPM, each premium is at time t explained by the product of the price of risk by the expected variance of returns, these two magnitudes being horizon dependant. The expected variances depend on the past values of the centered squared returns (we found 5 and 8 years for the one year and the infinite horizon, respectively). For each horizon, the price of risk is determined by a spread of interest rates capturing economic factors of uncertainty and by an unobservable variable determined according to the kalman filter methodology (i.e. a state variable). The state variables are supposed to capture the influence of hidden variables and of non directly measurable psychological effects. The model gives a valuable representation of the "short term" and "long term" premia.
    Keywords: equity risk premium, time horizon
    JEL: D81 D84 E44 G11 G12
    Date: 2010
  6. By: Tigran Poghosyan
    Abstract: This paper analyzes macroeconomic determinants of the foreign exchange risk premium in two Gulf Cooperation Council (GCC) countries that peg their currencies to the U.S. dollar: Saudi Arabia and the United Arab Emirates. The analysis is based on the stochastic discount factor methodology, which imposes a no arbitrage condition on the relationship between the foreign exchange risk premium and its macroeconomic determinants. Estimation results suggest that U.S. inflation and consumption growth are important factors driving the risk premium, which is in line with the standard C-CAPM model. In addition, growth in international oil prices influences the risk premium, reflecting the important role played by the hydrocarbon sector in GCC economies. The methodology employed in this paper can be used for forecasting the risk premium on a monthly basis, which has important practical implications for policymakers interested in the timely monitoring of risks in the GCC.
    Keywords: Consumption , Cooperation Council for the Arab States of the Gulf , Currency pegs , Economic models , Foreign exchange , Inflation , Oil prices , Risk premium , Saudi Arabia , United Arab Emirates , United States ,
    Date: 2010–11–11
  7. By: Nicole Wiebach; Lutz Hildebrandt
    Abstract: The delisting of brands is frequently used by retailers to strengthen their negotiating position with the manufacturers and suppliers of their product assortment. However, retailers and manufacturers have to consider the risk of potential reactions when customers are faced with a reduced or modified assortment and thus, different choice. In this paper, two studies are presented which investigate customers` switching behavior if a (sub-)brand is unavailable and key determinants of the resulting behavior are discussed. Various conditions are tested by taking into account context theory. The results reveal that customer responses depend significantly on the context. A real-life quasi-experiment suggests that manufacturers may encounter substantially larger losses than retailers. Managerial implications for both parties can be derived and recommendations for further research are developed.
    Keywords: Consumer decisions, delisting, context effects, switching behavior, retailing, logistic regression
    JEL: M31 C12 C13 C25
    Date: 2010–11
  8. By: Tymofiy Mylovanov (Penn State University); Andriy Zapechelnyuk (Queen Mary, University of London)
    Abstract: This paper studies optimal decision rules for a decision maker who can consult two experts in an environment without monetary payments. This extends the previous work by Holmström (1984) and Alonso and Matouschek (2008) who consider environments with one expert. In order to derive optimal decision rules, we prove a "constant-threat" result that states that any out-of-equilibrium pair of recommendations by the experts are punished with an action that is independent of their reports. A particular property of an optimal decision rule is that it is simple and constant for a large set of experts' preferences and distribution of their private information. Hence, it is robust in the sense that it is not affected by errors in specifying these features of the environment. By contrast, the constructions of optimal outcomes absent commitment or with only one expert are sensitive to model details.
    Keywords: Communication, Information, Noise, Experts, Constant threat
    JEL: C72 D82 D83
    Date: 2010–11
  9. By: Petr Mariel (Department of Applied Economics III (Econometrics and Statistics), University of the Basque Country); Amaya De Ayala (Department of Applied Economics III (Econometrics and Statistics), University of the Basque Country); David Hoyos (Department of Applied Economics III (Econometrics and Statistics), University of the Basque Country); Sabah Abdullah (Environmental Economics Unit, Institute for Public Economics, University of the Basque Country)
    Abstract: This paper examines the various tests commonly used to select random parameters in choice modelling. The most common procedures for selecting random parameters are: the Lagrange Multiplier test as proposed by McFadden and Train (2000), the t-statistic of the deviation of the random parameter and the log-likelihood ratio test. The identification of random parameters in other words the recognition of preference heterogeneity among population is based on the fact that an individual makes a choice depending on her/his: tastes, perceptions and experiences. A simulation experiment was carried out based on a real choice experiment and the results indicated that the power of these three tests depends importantly on the spread and type of the tested parameter distribution.
    Keywords: choice experiment, preference heterogeneity, random parameter logit, simulation, tests for selecting random parameters
    JEL: Q51
    Date: 2010–11–23

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