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on Utility Models and Prospect Theory |
| By: | Richard Ruble (EMLyon Business School - EMLYON Business School, GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon) |
| Abstract: | An article about Kihlstrom and Mirman about comparative risk aversion with many goods is critiqued. If "more risk averse" is interpreted as signifying that an individual is less willing to accept a median-preserving spread, then risk aversion cannot be compared across individuals with different preferences. If it is interpreted as signifying that an individual has a greater directional risk premium, then risk aversion may be compared across individuals with different preferences, in particular in partial equilibrium analysis. |
| Keywords: | risk aversion, risk premium |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00585615&r=upt |
| By: | Lefebvre, Mathieu; Vieider, Ferdinand M. |
| Abstract: | Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting as executives do also take risks that are excessive from the perspective of shareholders if compensated through options. Compensation through restricted company stock reduces the uptake of excessive risks. Even under stock-ownership, however, experimental executives continue to take excessive risks—a result that cannot be accounted for by classic incentive theory. We develop a basic model in which such risk-taking behavior is explained based on a richer array of risk attitudes derived from Prospect Theory. We use the model to derive hypotheses on what may be driving excessive risk taking in the experiment. Testing those hypotheses, we find that most of them are indeed borne out by the data. We thus conclude that a prospect-theory-based model is more apt at explaining risk attitudes under different compensation regimes than traditional principal-agent models grounded in expected utility theory. |
| Keywords: | prospect theory; expected utility theory; risk attitude; executive compensation; reference dependence; experimental finance |
| JEL: | G28 G32 J33 L22 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:12210&r=upt |
| By: | Patrick Beißner (Institute of Mathematical Economics, Bielefeld University) |
| Abstract: | This paper establishes, in the setting of Brownian information, a general equilibrium existence result under a stochastic differential formulation of intertemporal recursive utility. The present class of utility functionals is generated by a backward stochastic differential equation and incorporates preference for the local risk of the stochastic utility process. The setting contains models in which Knightian uncertainty is represented in the subjective and objective sense. |
| Keywords: | BSDE, GSDU, super-gradient, properness, general equilibrium, Knightian uncertainty |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:447&r=upt |
| By: | Jan-Erik Lönnqvist; Markku Verkasalo; Gari Walkowitz; Philipp C. Wichardt |
| Abstract: | This paper compares two prominent empirical measures of individual risk attitudes - the Holt and Laury (2002) lottery-choice task and the multi-item questionnaire advocated by Dohmen, Falk, Huffman, Schupp, Sunde and Wagner (forthcoming) - with respect to (a) their within-subject stability over time (one year) and (b) their correlation with actual risk-taking behaviour in the lab - here the amount sent in a trust game (Berg, Dickaut, McCabe, 1995). As it turns out, the measures themselves are uncorrelated (both times) and, most importantly, only the questionnaire measure exhibits test-re-test stability ( · =.78), while virtually no such stability is found in the lottery-choice task. In addition, only the questionnaire measure shows the expected correlations with a Big Five personality measure and is correlated with actual risk-taking behaviour. The results suggest that the questionnaire is the more adequate measure of individual risk attitudes for the analysis of behaviour in economic (lab) experiments. Moreover, with respect to trust, the high re-test stability of trust transfers ( ·= .70) further supports the conjecture that trusting behaviour indeed has a component which itself is a stable individual characteristic (Glaeser, Laibson, Scheinkman and Soutter, 2000). |
| Keywords: | Risk attitudes, trust, personality, lab experiments |
| JEL: | D81 C91 Z10 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp370&r=upt |
| By: | Nicola Frignani (Università di Ferrara); Giovanni Ponti (Universidad de Alicante) |
| Abstract: | This paper reports experimental evidence from a Dictator Game experiment in which subjects choose repeatedly one out of four options involving a pair of fixed monetary prizes, one for them, one for another anonymously matched subject. In some sessions, player position (i.e. the identity of the best paid agent, constant across all options) is known in advance before subjects have to make their decision; in other sessions subjects choose “under the veil of ignorance”, not knowing to which player position they will be eventually assigned. We also collect evidence from additional sessions in which the same options correspond to binary lotteries, in which subjects may win the high or the low prize, but their decisions do not affect other participants. We frame subjects’ decisions within the realm of a simple mean-variance utility maximization problem, where the parameter associated to the variance is interpreted, depending on the treatment conditions, as a measure of pure risk aversion, pure inequality aversion, or some combination of the two. We also condition our estimates to subjects’ individual socio-demographic characteristics. |
| Keywords: | Keywords: dictator games, social preferences, risk preferences, functional identification. |
| JEL: | D86 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2011-07&r=upt |
| By: | Giuseppe Benedetti (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Luciano Campi (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX, FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX) |
| Abstract: | In this paper we deal with a utility maximization problem at finite horizon on a continuous-time market with conical (and time varying) constraints (particularly suited to model a currency market with proportional transaction costs). In particular, we extend the results in Campi and Owen (2011) to the situation where the agent is initially endowed with a random and possibly unbounded quantity of assets. We start by studying some basic properties of the value function (which is now defined on a space of random variables), then we dualize the problem following some convex analysis techniques which have proven very useful in this field of research. We finally prove the existence of a solution to the dual and (under an additional boundedness assumption on the endowment) to the primal problem. The last section of the paper is devoted to an application of our results to utility indifference pricing. |
| Keywords: | Transaction costs ; Foreign exchange market ; Multivariate utility function ; Optimal portfolio ; Duality theory ; Random endowment ; Utility-based pricing |
| Date: | 2011–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00586377&r=upt |