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on Utility Models and Prospect Theory |
| By: | Steffen Andersen (Copenhagen Business School); Glenn W. Harrison (Robinson College of Business, Georgia State University); Morten Lau (Durham Business School); Elisabet E. Rutstroem (Robinson College of Business, Georgia State University) |
| Abstract: | Convenient assumptions about qualitative properties of the intertemporal utility function have generated counter-intuitive implications for the relationship between atemporal risk aversion and the intertemporal elasticity of substitution. If the intertemporal utility function is additively separable then the latter two concepts are the inverse of each other. We review a simple theoretical specification with a long lineage in the literature on multi-attribute utility, and demonstrate the critical role of a concept known as intertemporal risk aversion or intertemporal correlation aversion. This concept is the intertemporal analogue of a more general concept applied to two attributes of utility, but where the attributes just happen to be the time-dating of the good. In the context of intertemporal utility functions, the concept provides an intuitive explanation of possible differences between (the inverse of) atemporal risk aversion and the intertemporal elasticity of substitution. We use this theoretical structure to guide the design of a series of experiments that allow us to identify and estimate intertemporal correlation aversion. Our results show that subjects are correlation averse over lotteries with intertemporal income profiles, and that the convenient additive specification of the intertemporal utility function is not an appropriate representation of preferences over time. |
| Date: | 2011–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:dur:durham:2011_03&r=upt |
| By: | Steffen Andersen (Copenhagen Business School); James C. Cox (Robinson College of Business, Georgia State University); Glenn W. Harrison (Robinson College of Business, Georgia State University); Morten Lau (Durham Business School); Elisabet E. Rutstroem (Robinson College of Business, Georgia State University); Vjollca Sadiraj (Robinson College of Business, Georgia State University) |
| Abstract: | Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decision-maker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiments is consistent with partial asset integration: they behave as if some small fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings. |
| Date: | 2011–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:dur:durham:2011_10&r=upt |
| By: | Simone Cerreia-Vioglio |
| Abstract: | We provide a bridge between Bewley preferences [2] and Uncertainty averse preferences [4]. In doing this, we generalize the ?ndings of Gilboa, Maccheroni, Marinacci, and Schmeidler [11]. To exemplify this new framework, we then study a class of preferences that we call Constrained Multiplier preferences and that was ?rst proposed by Wang [19]. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:413&r=upt |
| By: | Bellemare, Charles (Université Laval); Sebald, Alexander (University of Copenhagen) |
| Abstract: | We show how to bound the effect of belief-dependent preferences on choices in sequential two-player games without information about the (higher-order) beliefs of players. The approach can be applied to a class of belief-dependent preferences which includes reciprocity (Dufwenberg and Kirchsteiger, 2004) and guilt aversion (Battigalli and Dufwenberg, 2007) as special cases. We show how the size of the bounds can be substantially reduced by exploiting a specific invariance property common to preferences in this class. We illustrate our approach by analyzing data from a large scale experiment conducted with a sample of participants randomly drawn from the Dutch population. We find that behavior of players in the experiment is consistent with significant guilt aversion: some groups of the population are willing to pay at least 0.16e to avoid 'letting down' another player by 1e. We also find that our approach produces narrow and thus very informative bounds on the effect of reciprocity in the games we consider. Our bounds suggest the model of reciprocity we consider is not a significant determinant of decisions in our experiment. |
| Keywords: | belief-dependent preferences, guilt aversion, reciprocity, partial identification |
| JEL: | C93 D63 D84 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5957&r=upt |
| By: | Lev Ratnovski; Enrico Perotti; Razvan Vlahu |
| Abstract: | The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high 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: | Bank regulations , Banks , Capital , Economic models , Risk management , |
| Date: | 2011–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/188&r=upt |
| By: | Hammond, Peter J (Department of Economics, University of Warwick) |
| Abstract: | The subjective expected utility (SEU) criterion is formulated for a particular four-person “laboratory game” that a Bayesian rational decision maker plays with Nature, Chance, and an Experimenter who influences what quantum behaviour is observable by choosing an orthonormal basis in a separable complex Hilbert space of latent variables. Nature chooses a state in this basis, along with an observed data series governing Chance's random choice of consequence. When Gleason's theorem holds, imposing quantum equivalence implies that the expected likelihood of any data series w.r.t. prior beliefs equals the trace of the product of appropriate subjective density and likelihood operators. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:969&r=upt |
| By: | Anna Conte (Max Planck Institute of Economics, Jena, and University of Westminster, EQM Department, London); M. Vittoria Levati (Max Planck Institute of Economics, Jena, and University of Verona, Department of Economics) |
| Abstract: | In a series of one-shot linear public goods game, we ask subjects to report their contributions, their contribution plans for the next period, and their first-order beliefs about their present and future partner. We estimate subjects' preferences from plans data by a finite mixture approach and compare the results with those obtained from contribution data. Our results indicate that preferences are heterogeneous, and that most subjects exhibit conditionally cooperative inclinations. Controlling for beliefs, which incorporate the information about the other's decisions, we are able to show that plans convey accurate information about subjects' preferences and, consequently, are good predictors of their future behavior. |
| Keywords: | Public goods games, Experiments, Social preferences, Mixture models |
| JEL: | C35 C51 C72 H41 |
| Date: | 2011–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-039&r=upt |