
on Utility Models and Prospect Theory 
By:  Simone CerreiaVioglio; Fabio Maccheroni; Massimo Marinacci; Luigi Montrucchio 
Abstract:  We study the interplay of probabilistic sophistication, second order stochastic dominance, and uncertainty aversion, three fundamental notions in choice under uncertainty. In particular, our main result, Theorem 2, characterizes uncertainty averse preferences that satisfy second order stochastic dominance, as well as uncertainty averse preferences that are probabilistically sophisticated. 
Keywords:  Probabilistic Sophistication; Second Order Stochastic Dominance; Uncertainty Aversion; Unambiguous Events; Subjective Expected Utility 
JEL:  D81 
Date:  2010 
URL:  http://d.repec.org/n?u=RePEc:cca:wpaper:174&r=upt 
By:  Thierry Chauveau (CES  Centre d'économie de la Sorbonne  CNRS : UMR8174  Université PanthéonSorbonne  Paris I); Nicolas Nalpas (Toulouse Business School  ESC Toulouse) 
Abstract:  In this paper, a fully choicebased theory of disappointment is developed. It encompasses, as particular cases, EU theory, Gul's theory of disappointment (1991) and the models of Loomes and Sugden (1986). According to the new theory, the risk premium of a random prospect is the sum of two premiums : a concavity premium that is nothing but the usual ArrowPratt premium and a second premium that may be identified to expected disappointment. The corresponding representing functional belongs to the class of lotterydependent utility models (Becker and Sarin 1987) since disappointment is the deficit between the utility of the realized outcome and its expected value. However, unlike the lotterydependent approach, the theory is choicebased and its axioms are experimentally testable. 
Keywords:  Axiomatisation, aversion pour la déception, revenu aléatoire, prime de risque, utilité espérée. 
Date:  2010–12 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:halshs00560543&r=upt 
By:  Francisco Martinez Mora; M. Socorro Puy 
Abstract:  We introduce two natural types of asymmetric singlepeaked preferences, which we name biasedabove and biasedbelow, depending on whether the asymmetry (or preferencebias) favors alternatives above or below the peak. We de.ne a rich family of utility functions, the generalized distancemetric utility functions, that can represent preferences biasedabove or biasedbelow, besides accommodating any degree of asymmetry. We also identify restrictions on differentiable utility representations that guarantee the underlying preferences to be biasedabove or below, and allow to compare degrees of asymmetry. Finally, we consider a specific application agents preferences over government size to illustrate the role of factors such as risk aversion and tax distortions in shaping asymmetric preferences. 
Keywords:  Singlepeaked preferences; asymmetric preferences; quadratic preferences; risk aversion; prudence 
JEL:  D72 H31 H5 
Date:  2011–01 
URL:  http://d.repec.org/n?u=RePEc:lec:leecon:11/18&r=upt 
By:  Burkhard, Schipper (University of California Davis) 
Abstract:  We develop awarenessdependent subjective expected utility by taking unawareness structures introduced in Heifetz, Meier, and Schipper (2006, 2008, 2009) as primitives in the AnscombeAumann approach to subjective expected utility. We observe that a decision maker is unaware of an event if and only if her choices reveal that the event is "null" and the negation of the event is "null". Moreover, we characterize "impersonal" expected utility that is behaviorally indistinguishable from awarenessdependent subject expected utility and assigns probability zero to some subsets of states that are not necessarily events. We discuss in what sense probability zero can model unawareness. 
JEL:  C70 C72 D80 D81 
Date:  2010–12 
URL:  http://d.repec.org/n?u=RePEc:ecl:ucdeco:1022&r=upt 
By:  Drichoutis, Andreas; Koundouri, Phoebe 
Abstract:  We elicit and compare risk preferences from student subjects and subjects drawn from the general population, using the multiple price list method devised by Holt and and Laury (2002). We find evidence suggesting that students have lower relative risk aversion than others. 
Keywords:  Risk aversion; CRRA; expopower; multiple price list 
JEL:  D81 D01 C91 
Date:  2011–01 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:28438&r=upt 
By:  Anat Bracha; Donald J. Brown 
Abstract:  Optimism bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, we propose an alternative model of risky choice, affective decision making, where decision weights—which we label affective or perceived risk—are endogenized. Affective decision making (ADM) is a strategic model of choice under risk where we posit two cognitive processes—the "rational" and the "emotional" process. The two processes interact in a simultaneousmove intrapersonal potential game, and observed choice is the result of a pure Nash equilibrium strategy in this game. We show that regular ADM potential games have an odd number of locally unique pure strategy Nash equilibria, and demonstrate this finding for ADM in insurance markets. We prove that ADM potential games are refutable by axiomatizing the ADM potential maximizers. 
Keywords:  Insurance 
Date:  2010 
URL:  http://d.repec.org/n?u=RePEc:fip:fedbwp:1016&r=upt 
By:  David Peel; Ivan Paya; TrinoManuel Niguez; Javier Perote 
Abstract:  Economic growth models under uncertainty and rational agents with CRRA utility have been shown to provide quite fragile explanations of consumers.choice as equlib rium comsumption paths (expected utility) are drastically dependant on distributional assumptions. We show that assuming a SNP distribution for random consumption provides stability to general equilibrium models as expected utility exists for any value of the marginal rate of substitution over time. 
Keywords:  Bayesian learning; Rational expectations; Seminonparametric distribu tions. 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:lan:wpaper:007201&r=upt 
By:  Elyès Jouini (CEREMADE  CEntre de REcherches en MAthématiques de la DEcision  CNRS : UMR7534  Université Paris Dauphine  Paris IX); Clotilde Napp (CREST  Centre de Recherche en Économie et Statistique  INSEE  École Nationale de la Statistique et de l'Administration Économique, DRM  Dauphine Recherches en Management  CNRS : UMR7088  Université Paris Dauphine  Paris IX); Diego Nocetti (CIMS  Courant Institute of Mathematical Science  New York University) 
Abstract:  In this paper we analyse the risk attitude of a group of heterogenous agents and we develop a theory of comparative collective risk tolerance. In particular, we characterize how shifts in the distribution of individual levels of risk tolerance affect the representative agent's degree of risk tolerance. In the model with efficient risk – sharing and two agents (e.g. a household) with isoelastic preferences we show that an increase of the level of risk tolerance of one of the agents might have an ambiguous impact on the aggregate level of risk tolerance; the latter increases for some levels of aggregate wealth while it decreases for other levels of aggregate wealth. Specifically, there are two possible shapes for aggregate risk tolerance as a function of the risk tolerance level of one of the agents: increasing curve or increasing then decreasing curve. For more general populations we characterize the effect of first order like shifts (individual levels of risk tolerance more concentrated on high values) and second order like shifts (more dispersion on individual levels of risk tolerance) on the collective level of risk tolerance. We also evaluate how shifts in the distribution of individual levels of risk tolerance impact the collective level of risk tolerance in a framework with exogenous egalitarian sharing rules. Our results permit to better characterize differences in risk taking behavior between groups and individuals and among groups with different distribution of risk preferences. 
Keywords:  heterogenous agents, collective risk, risk tolerance, isoelastic preferences, aggregate wealth, risk preferences 
Date:  2010–10–05 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs00559137&r=upt 
By:  Sessi Topkavi 
Abstract:  This paper takes a minimax regression approach to incorporate aversion to parameter uncertainty into the meanvariance model. The uncertaintyaverse minimax meanvariance portfolio is obtained by minimizing with respect to the unknown weights the upper bound of the usual quadratic risk function over a fuzzy ellipsoidal set. Beyond the existing approaches, our methodology offers three main advantages: first, the resulting optimal portfolio can be interpreted as a Bayesian meanvariance portfolio with the least favorable prior density, and this result allows for a comprehensive comparison with traditional uncertaintyneutral Bayesian meanvariance portfolios. Second, the minimax meanvariance portfolio has a shrinkage expression, but its performance does not necessarily lie within those of the two reference portfolios. Third, we provide closed form expressions for the standard errors of the minimax meanvariance portfolio weights and statistical significance of the optimal portfolio weights can be easily conducted. Empirical applications show that incorporating aversion to parameter uncertainty leads to more stable optimal portfolios that outperform traditional uncertaintyneutral Bayesian meanvariance portfolios. 
Keywords:  Asset allocation, estimation error, aversion to uncertainty, minimax regression, Bayesian meanvariance portfolios, least favorable prior 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:drm:wpaper:20111&r=upt 