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on Utility Models and Prospect Theory |
| By: | Peters Hans (METEOR) |
| Abstract: | Following prospect theory we consider decision making under risk in which the decision maker''s preferences depend on a reference outcome. An outcome below this reference outcome is regarded as resulting from a loss: a loss decreases the decision maker''s basic utility more than a comparable gain increases this utility. An elegant and simple method to model this phenomenon was proposed by Shalev (2002): the utility of an outcome below the reference outcome is obtained from the basic utility by subtracting a multiple of the loss in basic utility: this multiple, the loss aversion coefficient, is constant across different reference outcomes. We provide a preference foundation for this loss aversion model. |
| Keywords: | econometrics; |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2010062&r=upt |
| By: | Kontek, Krzysztof |
| Abstract: | This paper presents the functional relationship between two areas of interest in contemporary behavioral economics: one concerning choices under conditions of risk, the other concerning choices in time. The paper first presents the general formula of the relationship between decision utility, the survival function, and the discounting function, where decision utility is an alternative to Cumulative Prospect Theory in describing choices under risk (Kontek, 2010). The stretched exponential function appears to be a simple functional form of the resulting discounting function. Solutions obtained using more complex forms of decision utility and survival functions are also considered. These likewise lead to the stretched exponential discounting function. The paper shows that the relationship may also have other forms, including the hyperbolic functions typically used to describe the intertemporal experimental results. This solution has however several descriptive disadvantages, which restricts its common use in the description of lottery and intertemporal choices, and in financial asset valuations. |
| Keywords: | Discounted Utility; Hyperbolic Discounting; Decision Utility; Prospect Theory; Asset Valuation |
| JEL: | E43 G12 D81 D90 C91 |
| Date: | 2010–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27541&r=upt |
| By: | Simon Gaechter (University of Nottingham); Eric J. Johnson (Columbia University); Andreas Herrmann (University of St Gallen) |
| Abstract: | Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education. |
| Keywords: | Loss aversion, endowment effect, field experiments |
| JEL: | C91 C93 D81 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2010-20&r=upt |
| By: | Matthias Sutter; Martin G. Kocher; Daniela Rützler; Stefan T. Trautmann |
| Abstract: | We study risk attitudes, ambiguity attitudes, and time preferences of 661 children and adolescents, aged ten to eighteen years, in an incentivized experiment. We relate experimental choices to field behavior. Experimental measures of impatience are found to be significant redictors of health related field behavior and saving decisions. In particular, more impatient children and adolescents are more likely to spend money on alcohol and cigarettes, have a higher body mass index (BMI) and are less likely to save money. Experimental measures for risk and ambiguity attitudes are only weak predictors of field behavior. |
| Keywords: | experiments with children and adolescents; risk; ambiguity; time preferences; health status; savings; external validity; field behavior. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2010-29&r=upt |
| By: | Lemoine, Derek M.; Traeger, Christian P. |
| Abstract: | The threat of crossing tipping points in the climate system often serves as an argument for more stringent greenhouse gas emission reductions. We introduce such regime shifts into a recursive relative of the DICE integrated assessment model for determining optimal climate policies. Each period's carbon dioxide concentration determines the probability of crossing a tipping point, and the policymaker re-optimizes once a tipping point occurs. The probability, timing, and knowledge of tipping points are endogenous. Our policymaker can also display ambiguity aversion in assessing tipping point uncertainty. We fi�nd that tipping points increase the near-term social cost of carbon by 50-100% when they raise climate sensitivity or make damages more convex. They have less of an e�ffect when they increase the atmospheric lifetime of CO2 or the quantity of non-CO2 greenhouse gases. Uncertainty about tipping points can reduce their e�ffect on policy. The possibility of tipping points is more important for the social cost of carbon than is the ambiguity attitude used in their evaluation. |
| Keywords: | climate change, tipping points, ambiguity aversion, uncertainty, integrated assessment, risk aversion, intertemporal substitution, recursive utility, dynamic programming |
| Date: | 2010–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:agrebk:1704668&r=upt |
| By: | De Marco, Giuseppe; Romaniello, Maria |
| Abstract: | The Nash equilibrium concept combines two fundamental ideas. First, rational players choose the most preferred strategy given their beliefs about what other players will do. Second, it imposes the consistency condition that all players' beliefs are correct. This consistency condition has often been considered too strong and different solution concepts have been introduced in the literature in order to take into account ambiguous beliefs. In this paper, we show, by means of examples, that in some situation beliefs might be dependent on the strategy profile and that this kind of contingent ambiguity affects equilibrium behavior differently with respect to the existing models of ambiguous games. Hence we consider a multiple prior approach and subjective beliefs correspondences which depend on the strategy profile; we investigate existence of the equilibrium concepts corresponding to different attitudes towards ambiguity (namely optimism and pessimism). Finally we analyze particular beliefs correspondences: beliefs given by correlated equilibria and by ambiguity levels on events. |
| Keywords: | Noncooperative games; ambiguity; beliefs correspondence; equilibrium |
| JEL: | D81 C72 |
| Date: | 2010–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27507&r=upt |
| By: | Larry Samuelson; Jeroen Swinkels |
| Date: | 2010–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:506439000000000472&r=upt |
| By: | Dalton, Patricio; Ghosal, Sayantan (CentRE, Tillburg University; University of Warwick) |
| Abstract: | We study the public policy implications of a model in which agents do not fully internalize all the conscequences of their actions. Such a model unifies seemingly disconected models with behavioral agents. We evaluate the scope of paternalistic and libertarian-parternalistic policies in the light of our model, and propose an alternative type of approach, called soft-libertarian, which guides the decision makers in the internalization of all the conscequences of their actions. Psychotherapy is one example of a soft-libertarian policy. Moreover, we show that in our behavioral framework, policies that increase the set of opportunities or provide more information to the agent may not longer be individual welfare improving. |
| Keywords: | Behavioral Decisions, Revealed Preferences, Normative Preferences, Paternalism, Soft-Libertarian, Autonomy, Psychotherapy |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:37&r=upt |
| By: | Le, Anh T. (Curtin University of Technology); Miller, Paul W. (Curtin University of Technology); Slutske, Wendy S. (University of Missouri-Columbia); Martin, Nicholas G. (Queensland Institute of Medical Research) |
| Abstract: | This paper examines the links between gender differences in attitudes towards economic risk and the gender pay gap. Consistent with the literature on the socio-economic determinants of attitudes towards economic risk, it shows that females are much more risk averse than males. It then extends this research to show that workers with more favorable attitudes towards risk are associated with higher earnings, and that gender differences in attitudes towards economic risk can account for a small, though important, part of the standardized gender pay gap. |
| Keywords: | wages, gender, risk, wage gap |
| JEL: | J31 J71 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5393&r=upt |