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on Utility Models and Prospect Theory |
| By: | Kerri Brick; Martine Visser; Justine Burns |
| Abstract: | We estimate the risk attitudes of a large sample of small-scale fishers from various fishing communities along the west coast of South Africa, using subjects’ choices over lotteries with real monetary prizes. We find that participants are moderately risk averse and that risk attitudes vary with certain socio-demographic variables. In particular, females are found to be more risk averse than their male counterparts, while quota holders are more risk loving. Logistic regression analysis indicates that risk attitudes have implications for non-compliance with fisheries regulation. Specifically, greater risk aversion translates into a reduction in the odds of catching illegally. Furthermore, in the case of gender, female fishers and female fishers with fishing rights are more likely to comply with fisheries regulation. These findings have important implications for the characterisation of risk attitudes in fisheries policy applications and for the management of marine resources. |
| Keywords: | risk attitudes risk aversion experiments fishing rights compliance and South Africa |
| JEL: | D81 Q22 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:227&r=upt |
| By: | Heng-fu Zou (Central University of Finance and Economics; Shenzhen University; Wuhan University; Peking University); Liutang Gong (Guanghua School of Management, Peking University); Xinsheng Zeng (Wuhan University) |
| Abstract: | With inflation aversion, an increase in the monetary growth rate decreases the steady-state value of capital stock, consumption, and real balance holding. |
| Keywords: | Inflation aversion, Capital accumulation, Money |
| JEL: | D91 E63 O23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:481&r=upt |
| By: | Klaus Adam; Albert Marcet |
| Abstract: | We present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are 'internally rational', i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be 'externally rational', i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors' expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agents' market knowledge. |
| Keywords: | learning, internal rationality, consumption based asset pricing |
| JEL: | G12 G14 D83 D84 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1068&r=upt |
| By: | Roman Muraviev |
| Abstract: | We consider a power utility maximization problem with additive habits in a framework of discrete-time markets and random endowments. For certain classes of incomplete markets, we establish estimates for the optimal consumption stream in terms of the aggregate state price density, investigate the asymptotic behaviour of the propensity to consume (ratio of the consumption to the wealth), as the initial endowment tends to infinity, and show that the limit is the corresponding quantity in an artificial market. For complete markets, we concentrate on proving the existence of an Arrow-Debreu equilibrium in an economy inhabited by heterogeneous individuals who differ with respect to their risk-aversion coefficient, impatience rate and endowments stream, but possess the same degree of habit-formation. Finally, in a representative agent equilibrium, we compute explicitly the price of a zero coupon bond and the Lucas tree equity, and study its dependence on the habit-formation parameter. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1108.2889&r=upt |
| By: | Da Silva, Sergio; Baldo, Dinora; Matsushita, Raul |
| Abstract: | We conducted a questionnaire study with student subjects to look for explicit correlations between selected biological characteristics of the subjects and manifestation of the Allais paradox in the pattern of their choices between sets of two pairs of risky prospects. We found that particular characteristics, such as gender, menstrual cycle, mother’s age at delivery, parenthood, second- to fourth-digit ratio, perceived negative life events, and emotional state, can be related to the paradox. Women,particularly when not menstruating, are less susceptible to the paradox. Those born to not-too-young mothers are also less prone to the paradox. The same holds true for men who have fathered children and had been exposed to high levels of prenatal testosterone, people who had experienced many negative life events, and those who were anxious, excited, aroused, happy, active, or fresh at the time of the experiment. Further, left-handers and atheists may be less inclined to display the paradox. |
| Keywords: | Allais paradox; choice under risk; biological characteristics; experimental economics |
| JEL: | D81 C91 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32747&r=upt |
| By: | Gaowang Wang (School of Economics and Management, Wuhan University); Heng-fu Zou (CEMA, Central University of Finance and Economics; China School of Advanced Study (SAS), Shenzhen University; IAS, Wuhan University; GSM, Peking University) |
| Abstract: | The optimal inflation tax is reexamined in the framework of dynamic second best economy populated by individuals with inflation aversion. A simple formula for the optimal inflation rate is derived. Different from the literature, it is shown that if the marginal excess burden of other distorting taxes approaches zero, Friedman's rule for optimum quantity of money is not optimal, and the optimal inflation tax is negative; if the marginal excess burden of other taxes is nonzero, the optimal inflation rate is indeterminate and relies on the tradeoffs between the impatience effect of inflation and the effects of other economic forces in the monetary economy. |
| Keywords: | Inflation aversion, Optimal inflation tax, Second best taxation, The friedman rule |
| JEL: | E31 E41 E52 H21 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:480&r=upt |
| By: | Perotti, Enrico C; Ratnovski, Lev; Vlahu, Razvan |
| Abstract: | The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended e¤ect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in nontail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation. |
| Keywords: | Capital regulation; Keywords: Banking; Risk; Risk-taking; Systemic risk; Tail risk |
| JEL: | G21 G28 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8526&r=upt |
| By: | Tarbush, Bassel |
| Abstract: | Following from Tarbush (2011a), we explore the implications of using two different definitions of informativeness over kens; one that ranks objective, and the other subjective information. With the first, we create a new semantic operation that allows us to derive agreement theorems even when decision functions are based on interactive information (for any r ≥ 0). Effectively, this operation, unlike information cell union captures the notion of an agent becoming “more ignorant” for all modal depths. Using the definition that ranks subjective information however, we show an impossibility result: In generic models, agreement theorems using the standard Sure-Thing Principle do not hold when decision functions depend on interactive information (when r > 0). |
| Keywords: | Agreeing to disagree; knowledge; common knowledge; belief; information; epistemic logic |
| JEL: | D89 D83 D80 |
| Date: | 2011–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32850&r=upt |
| By: | Enrico Perotti; Lev Ratnovski; Razvan Vlahu |
| Abstract: | The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation. |
| Keywords: | Banking; Capital regulation; Risk-taking; Tail risk; Systemic risk |
| JEL: | G21 G28 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:307&r=upt |