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on Utility Models and Prospect Theory |
| By: | Drichoutis, Andreas; Nayga, Rodolfo |
| Abstract: | We test whether induced mood states have an effect on elicited risk and time preferences in a conventional laboratory experiment. We jointly estimate risk and time preferences and use a mixture specification that allows choices to be consistent with Expected Utility theory or with probability weighting. Time preferences between subjects in the control, positive mood, and negative mood treatments are not statistically significantly different. However, for choices consistent with Expected Utility Theory, we find that subjects induced into a negative mood exhibit higher risk aversion than those in either the control treatment or the positive mood treatment. For choices that are consistent with probability weighting, we find that positive mood increases risk aversion. Results also suggest that risk preferences are affected by whether a cognitively demanding task precedes a risk preference elicitation task or whether subjects were placed in a gender-specific session rather than a mixed-gender session. |
| Keywords: | discount rates; risk aversion; lab experiment; mood; affect |
| JEL: | D81 D00 C91 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33013&r=upt |
| By: | Traeger, Christian P. |
| Abstract: | The paper analyzes the social discount rate under uncertainty. It employs a preference representation that enriches the characterization of uncertainty by a degree of confidence into probabilistic descriptions of the world. Special cases of the model comprise discounting under smooth ambiguity aversion as well as discounting under a disentanglement of risk aversion and aversion to intertemporal substitution. I relate different results in the literature switching risk measures between the classical Arrow Pratt form and a measure of intertemporal risk aversion. I characterize the general class of preferences for which uncertainty implies a reduction of the social discount rate. I also characterize the class of preferences that lower the discount rate compared to the standard model. I derive a particular parametric discounting formula under the assumptions of isoelastic preferences and normal growth rates. Apart from the usual characteristics of the growth process like expected value and variance, the discount rate depends on a measure of confidence into future growth estimates and a measure of aversion to the lack of confidence. |
| Keywords: | uncertainty, discounting, climate change, ambiguity, confidence, subjective beliefs, prudence, pessimism, expected utility, intertemporal substitutability, intertemporal risk aversion, Agricultural and Resource Economics |
| Date: | 2011–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:agrebk:2220876&r=upt |
| By: | Hamza Bahaji (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | This paper examines the incentives from stock options for loss-averse employees subject to probability weighting. Employing the certainty equivalence principle, I built on insights from Cumulative Prospect Theory (CPT) to derive a continuous time model to value options from the perspective of a representative employee. Consistent with a growing body of empirical and experimental studies, the model predicts that the employee may overestimate the value of his options in-excess of their risk-neutral value. This is nevertheless in stark contrast with a common finding of standard models based on the Expected Utility Theory (EUT) framework that options value to a risk-averse undiversified employee is strictly lower than the value to risk-neutral outside investors. In particular, I proved that loss aversion and probability weighting have countervailing effects on the option subjective value. In addition, for typical setting of preferences parameters around the experimental estimates, and assuming the company is allowed to adjust existing compensation when making new stock option grants, the model predicts that incentives are maximized for strike prices set around the stock price at inception. This finding is consistent with companies' actual compensation practices that standard EUT-based models have difficulties accommodating their existence. |
| Keywords: | Stock options, Cumulative Prospect Theory, Incentives, Subjective value |
| Date: | 2011–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00618477&r=upt |
| By: | Diewert, Erwin |
| Abstract: | The first part of the paper reviews the methodology developed by Sydney Afriat for determining whether a finite set of price and quantity data are consistent with utility maximizing behavior by a consumer. Some extensions of his basic model to models of consumer behavior where the structure of preferences is restricted in some way are also explained. Examples of special structures are homotheticity, separability and quasilinearity of the utility function. The second half of the paper is devoted to developing Afriat type consistency tests for expected and nonexpected utility maximizing behavior. |
| Keywords: | Revealed preference theory, Afriat inequalities, nonparametric approach to demand theory, homotheticity, separability, quasilinearity, testing for max |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:bricol:erwin_diewert-2011-22&r=upt |
| By: | Boone, J.; Schottmuller, C. (Tilburg University, Center for Economic Research) |
| Abstract: | Standard insurance models predict that people with high (health) risks have high insurance coverage. It is empirically documented that people with high income have lower health risks and are better insured. We show that income differences between risk types lead to a violation of single crossing in the standard insurance model. If insurers have some market power, this can explain the empirically observed outcome. This observation has also policy implications: While risk adjustment is traditionally viewed as an intervention which increases efficiency and raises the utility of low health agents, we show that with a violation of single crossing a trade off between efficiency and solidarity emerges. |
| Keywords: | Health insurance;single crossing;risk adjustment. |
| JEL: | D82 I11 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011095&r=upt |
| By: | Falk, Armin; Zimmermann, Florian |
| Abstract: | . |
| Keywords: | charitable giving; consistency preferences; early commitment; experiments; social influence |
| JEL: | C91 D64 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8519&r=upt |