
on Utility Models and Prospect Theory 
By:  Michèle Cohen (Centre d'Economie de la Sorbonne  Paris School of Economics); Isaac Meilijson (School of Mathematical Sciences  Tel Aviv University) 
Abstract:  Victor prefers safety more than Ursula if whenever Ursula prefers some constant to some uncertain act, so does Victor. This paradigm, whose Expected Utility version takes the form of Arrow & Pratt's more risk averse concept, will be studied in the Choquet Uncertainty model, letting u and ? (v and ?) be Ursula's (Victor's) utility and capacity. A necessary and sufficient condition (A) on the pairs (u, ?) and (v, ?) will be presented for dichotomous weak increased uncertainty aversion, the preference by Victor of a constant over a dichotomous act whenever such is the preference of Ursula. This condition, pointwise inequality between a function defined in terms of v (u1(?)) and another defined purely in terms of the capacities, preserves the flavor of the "more pessimism than greediness" characterization of monotone risk aversion by Chateauneuf, Cohen & Meilijson in the Rankdependent Utility Model and its extension by Grant & Quiggin to the Choquet Utility Model. A sufficient condition (B) in terms of the capacities only, satisfied in particular if ? (?) = f (? (?)) for some convex f, will be presented for more simplicity seeking, the preference by Victor over any act for some dichotomous act, that leaves Ursula indifferent. Condition A is thus a characterization of weak increased uncertainty aversion for convex f. An example will be exhibited disproving the more far reaching conjecture under which the dichotomous case implies the general case. 
Keywords:  Choquet Utility, greediness, pessimism, Rankdependent Utility, Risk aversion uncertainty. 
JEL:  D81 
Date:  2011–05 
URL:  http://d.repec.org/n?u=RePEc:mse:cesdoc:11031&r=upt 
By:  Diederik Aerts; Sandro Sozzo 
Abstract:  The Allais and Ellsberg paradoxes show that the expected utility hypothesis and Savage's SureThing Principle are violated in real life decisions. The popular explanation in terms of 'ambiguity aversion' is not completely accepted. On the other hand, we have recently introduced a notion of 'contextual risk' to mathematically capture what is known as 'ambiguity' in the economics literature. Situations in which contextual risk occurs cannot be modeled by Kolmogorovian classical probabilistic structures, but a nonKolmogorovian framework with a quantumlike structure is needed. We prove in this paper that the contextual risk approach can be applied to the Ellsberg paradox, and elaborate a 'sphere model' within our 'hidden measurement formalism' which reveals that it is the overall conceptual landscape that is responsible of the disagreement between actual human decisions and the predictions of expected utility theory, which generates the paradox. This result points to the presence of a 'quantum conceptual layer' in human thought which is superposed to the usually assumed 'classical logical layer'. 
Date:  2011–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1105.1814&r=upt 
By:  Fabrice Collard (Department of Economics  University of Bern); Sujoy Mukerji (Department of Economics and University College  University of Oxford); Kevin Sheppard (Department of Economics and OxfordMan Institute of Quantitative Finance  University of Oxford); JeanMarc Tallon (Centre d'Economie de la Sorbonne  Paris School of Economics) 
Abstract:  This paper assesses the quantitative impact of ambiguity on the historically observed equity premium. We consider a Lucastree pureexchange economy with a single agent where we introduce two key nonstandard assumptions. First, the agent's beliefs about the dividend/consumption process is ambiguous. Second, the agent's preferences are sensitive to this ambiguity. We further extend the model to allow for uncertainty about the magnitude of the persistence of the latent state. The agent's beliefs are ambiguous due to the uncertainty about the conditional mean of the probability distribution on consumption and dividends in the next period. This results in an endogenously volatile and (counter) cyclical equity premium. We calibrate the level of ambiguity aversion to match only the first moment of the riskfree rate in data, and ambiguity to match the uncertainty conditional on the historical growth path, and evaluate the model using moderate levels of risk aversion. We find that this simple modification of Lucastree model accounts for a large part of the historical equity premium, both in terms of its level and variation over time. 
Keywords:  Equity premium, ambiguity. 
JEL:  G12 E21 D81 C63 
Date:  2011–05 
URL:  http://d.repec.org/n?u=RePEc:mse:cesdoc:11032&r=upt 
By:  Franken, Jason R.V.; Pennings, Joost M.E.; Garcia, Philip 
Abstract:  We investigate the importance of an appropriate representation of behavior, risk attitude, and related characteristics for ownermanagers making marketing decisions. We assess whether managerial/firm characteristics directly affect the decisions or if their influence occurs indirectly through impacts on risk aversion. The findings, which support an indirect effect, indicate that failure to represent the relationship between risk aversion, other characteristics, and behavior appropriately can mask the effect of risk aversion. A more complete understanding of the structure of decision making may assist economists and policymakers in designing and targeting mechanisms to transfer risk. 
Keywords:  behavior, contract, hogs, marketing, risk attitude, Agribusiness, Institutional and Behavioral Economics, Marketing, Q13, 
Date:  2011–07–26 
URL:  http://d.repec.org/n?u=RePEc:ags:aaea11:103610&r=upt 
By:  LiÃ©geois, Philippe; Islam, Nizamul 
Abstract:  In discrete choice labour supply analysis, it is often reasonably expected that utility is increasing with income. Yet, analyses based on discrete choice models sometimes mention that, when no restriction is imposed a priori in the statistical optimization program, the monotonicity condition is not fully satisfied ex post. Obviously, the standard statistical optimization program might be completed with conditions (one per individual) imposing positive marginal utilities. Unfortunately, such a highdimensional program most often appears to be rather timeconsuming in order to be solved, if not practically unsolvable. In order to overcome this drawback, some authors impose general parametric restrictions a priori (hence reducing de facto the dimension of the parameter set), which is sufficient to lead to positive marginal utilities ex post. However, those restrictions might sometimes appear to be unnecessarily too severe and then generate a suboptimal set of estimated values for the parameters of the utility function. Alternatively, we show that it may be easy to avoid unnecessary restrictions. The highdimensional program including conditions for positive marginal utilities for all can sometimes be equivalently replaced by a onedimensional one. At the end, no observation is hopefully showing negative marginal utility anymore at optimum. 
Date:  2010–10–01 
URL:  http://d.repec.org/n?u=RePEc:ese:emodwp:em610&r=upt 
By:  Nataliya Barasinska 
Abstract:  This study investigates the role of gender in financial risktaking. Specifically, I ask whether female investors tend to fund less risky investment projects than males. To answer this question, I use reallife investment data collected at the largest German market for peertopeer lending. Investors' utility is assumed to be a function of the projects expected return and its standard deviation, whereas standard deviation serves as a measure of risk. Gender differences regarding the responses to projects' risk are tested by estimating a random parameter regression model that allows for variation of risk preferences across investors. Estimation results provide no evidence of gender differences in investors' risk propensity: On average, male and female investors respond similarly to the changes in the standard deviation of expected return. Moreover, no differences between male and female investors are found with respect to other characteristics of projects that may serve as a proxy for projects' risk. Significant gender differences in investors' tastes are found only with respect to preferred investment duration, purpose of investment project and borrowers' age. 
Keywords:  gender, investment choice, risk preferences 
JEL:  G11 G21 J16 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1125&r=upt 
By:  Kohei Daido (School of Economics, Kwansei Gakuin University); Takeshi Murooka (Department of Economics, University of California, Berkeley) 
Abstract:  This paper examines a multiagent moral hazard model in which agents have expectationbased referencedependent preferences `a la K˝oszegi and Rabin (2006, 2007). The agents’ utilities depend not only on their realized outcomes but also on the comparisons of their realized outcomes with their reference outcomes. Due to loss aversion, the agents have a firstorder aversion to wage uncertainty. Thus, reducing their expected losses by partially compensating for their failure may be beneficial for the principal. When the agent is loss averse and the project is hard to achieve, the optimal contract is based on team incentives which exhibit either joint performance evaluation or relative performance evaluation. Our results provide a new insight: team incentives serve as a losssharing device among agents. This model can explain the empirical puzzle of why firms often pay a bonus to lowperformance employees as well as highperformance employees. 
Keywords:  Moral Hazard, Team Incentives, ReferenceDependent Preferences, Loss Aversion, Joint Performance, Evaluation, Relative Performance Evaluation 
JEL:  D86 M12 M52 
Date:  2011–05 
URL:  http://d.repec.org/n?u=RePEc:kgu:wpaper:70&r=upt 
By:  Diederik Aerts; Sandro Sozzo 
Abstract:  Uncertainty in economics still poses some fundamental problems illustrated, e.g., by the Allais and Ellsberg paradoxes. To overcome these difficulties, economists have introduced an interesting distinction between 'risk' and 'ambiguity' depending on the existence of a (classical Kolmogorovian) probabilistic structure modeling these uncertainty situations. On the other hand, evidence of everyday life suggests that 'context' plays a fundamental role in human decisions under uncertainty. Moreover, it is well known from physics that any probabilistic structure modeling contextual interactions between entities structurally needs a nonKolmogorovian quantumlike framework. In this paper we introduce the notion of 'contextual risk' with the aim of modeling a substantial part of the situations in which usually only 'ambiguity' is present. More precisely, we firstly introduce the essentials of an operational formalism called 'the hidden measurement approach' in which probability is introduced as a consequence of fluctuations in the interaction between entities and contexts. Within the hidden measurement approach we propose a 'sphere model' as a mathematical tool for situations in which contextual risk occurs. We show that a probabilistic model of this kind is necessarily nonKolmogorovian, hence it requires either the formalism of quantum mechanics or a generalization of it. This insight is relevant, for it explains the presence of quantum or, better, quantumlike, structures in economics, as suggested by some authors, and can serve to solve the aforementioned paradoxes. 
Date:  2011–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1105.1812&r=upt 
By:  Uematsu, Hiroki; Ashok, Mishra K. 
Abstract:  Using a national survey, double hurdle models are estimated to examine the impact of farmersâ risk attitude on use of production and marketing contracts. Risk averse farmers are less likely to use contracts but risk attitude does not have any significant impact on the intensity at which contracts are adopted. 
Keywords:  Risk attitude, Double hurdle model, production contracts, marketing contracts, Agribusiness, Crop Production/Industries, Farm Management, Livestock Production/Industries, Marketing, Risk and Uncertainty, Q10, Q13, D81, 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:ags:aaea11:103851&r=upt 
By:  Lee, Youngjae; Kennedy, Lynn; Brian, Hilbun 
Keywords:  Agribusiness, Community/Rural/Urban Development, Crop Production/Industries, Institutional and Behavioral Economics, Production Economics, Risk and Uncertainty, 
Date:  2011–07–24 
URL:  http://d.repec.org/n?u=RePEc:ags:aaea11:103334&r=upt 