|
on Utility Models and Prospect Theory |
| By: | Haug, Jørgen (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Hens, Thorsten (Dept. of Banking and Finance, University of Zurich); Wöhrmann, Peter (Dept. of Management Science and Engineering, Stanford University) |
| Abstract: | Estimates of agents' risk aversion differ between market studies and experimental studies. We demonstrate that the estimates can be reconciled through consistent treatment of agents' tendency for narrow framing, regarding integration of background wealth as well as across risky outcomes: Risk aversion is similar whenever similar degrees of narrow framing is assumed in either setting. |
| Keywords: | Risk aversion; narrow framing; background wealth; laboratory experiments; market studies; equity premium puzzle |
| JEL: | D81 G11 G12 |
| Date: | 2011–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2011_012&r=upt |
| By: | Donatella Baiardi (Department of Economics and Quantitative Methods, University of Pavia); Matteo Manera (Department of Statistics, University of Milano-Bicocca, Italy and Fondazione Eni Enrico Mattei); Mario Menegatti (Department of Economics, University of Parma) |
| Abstract: | This paper studies the empirical relationship between consumption and saving under two different sources of uncertainty: financial risk and environmental risk. The analysis is carried out using time series data for six advanced economies in the period 1965-2007. The results support the theoretical conclusions that both financial risk alone and the interaction between financial and environmental risks affect consumption. Moreover, we suggest a solution to some shortcomings which concern the empirical analysis performed with one-argument utility functions. Finally, we provide new estimates of indexes of relative risk aversion and relative prudence, and relative preference of environmental quality. |
| Keywords: | Consumption, Precautionary Saving, Financial Risk, Environmental Risk, Prudence, Relative Risk Aversion, Uncertainty |
| JEL: | D81 E21 Q50 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2011.62&r=upt |
| By: | Keita Owari |
| Abstract: | The existence of optimal strategy in robust utility maximization is addressed when the utility function is finite on the entire real line. A delicate problem in this case is to find a "good definition" of admissible strategies, so that an optimizer is obtained. Under suitable assumptions, especially a time-consistency property of the set of probabilities which describes the model uncertainty, we show that an optimal strategy is obtained in the class of strategies whose wealths are supermartingales under all local martingale measures having a finite generalized entropy with at least one of candidate models (probabilities). |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1109.5512&r=upt |
| By: | M. Vittoria Levati (Max Planck Institute of Economics, Jena, and Department of Economics, University of Verona); Aaron Nicholas (Graduate School of Business, Deakin University); Birendra Rai (Department of Economics, Monash University) |
| Abstract: | We assess the empirical validity of the overall theoretical framework of other-regarding preferences by focusing on those preference axioms that are common to all the prominent theories of outcome-based other-regarding preferences. This common set of preference axioms leads to a testable implication: the strict preference ranking of self over a finite number of alternatives lying on any straight line in the space of material payoffs to self and other will be single-peaked. The extent of single-peakedness varies from a high of 79% to a low of 54% across our treatments that are based on dictator and trust games. Positively and/or negatively other-regarding subjects are significantly less likely to report single-peaked rankings relative to self-regarding subjects. We delineate the potential reasons for violations of single-peakedness and discuss the implications of our findings for theoretical modeling of other-regarding preferences. |
| Keywords: | Other-regarding preferences, social preferences, decision making under risk, single-peaked preferences, experiments |
| JEL: | C70 C91 D63 D81 |
| Date: | 2011–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-041&r=upt |
| By: | Philip J. Grossman |
| Abstract: | This paper investigates the persistence of gender stereotyping in the forecasting of risk attitudes. Subjects predict the gamble choice of target subjects in one of two treatments. First, based only on visual clues and then based on visual clues plus two responses by the target from a risk-preference survey. Second in reverse order: first, based only on the two responses then on the two responses plus visual clues. In isolation the gender stereotype and survey responses both inform predictions about others’ risk attitudes. In conjunction with one another, however, the stereotype persists and dominates the survey response information. |
| Keywords: | Experiment, Gender, Risk, Stereotype |
| JEL: | C91 D8 J16 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2011-28&r=upt |
| By: | Suriya, Komsan |
| Abstract: | This study invents four types of non-monotonic utility functions that suit the sufficiency economy. With these utility functions, an individual may not get higher utility when consume more goods. Therefore, an individual requires an optimal level of income rather than a maximized level of income to achieve the highest utility. |
| Keywords: | sufficiency economy; utility function; microeconomic analysis; consumption; optimality |
| JEL: | D11 B59 Q01 |
| Date: | 2011–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33783&r=upt |
| By: | Tin Cheuk Leung (The Chinese University of Hong Kong); Kwok Ping Tsang (Virginia Tech and Hong Kong Institute for Monetary Research) |
| Abstract: | In this paper we develop a simple model with anchoring and loss aversion to explain house price dynamics. We have two testable implications: 1) when both cognitive biases are present, price dispersion and trade volume are pro-cyclical; 2) if anchoring decreases with time, then price dispersion and trade volume are higher for transactions whose previous purchase is more recent. Using a dataset that contains most real estate transactions in Hong Kong from 1992 to 2006, we find strong and significant anchoring and loss aversion which are robust to type of housing and sample period. The finding is consistent with the strong correlation between house price, price dispersion, and volume in the data. Moreover, anchoring decreases with time since previous transaction, and both price dispersion and volume show the same pattern. Our results suggest that anchoring and loss aversion can induce cyclicality in house prices. |
| Keywords: | Price Dispersion, Anchoring, Loss Aversion, Housing Market |
| JEL: | R31 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:282011&r=upt |
| By: | Berliant, Marcus; Yu, Chia-Ming |
| Abstract: | Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under reasonable modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer's utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on the consumer's location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. |
| Keywords: | Urban Economics; General Equilibrium; Private Information; Rational Expectations |
| JEL: | R13 D82 D51 |
| Date: | 2011–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33754&r=upt |
| By: | Bjoern Hartig (CGS, University of Cologne) |
| Abstract: | This paper introduces a model of social preferences featuring a single parameter representing an individual's disposition to share resources with others. The parameter reacts to observed behavior of others in a clearly defined manner. Therefore, the model allows the numerical analysis of reciprocal interaction. Based on evolutionary concepts, the model is characterized by a very basic utility maximization condition and it is consistent with and often predictive of the results of a multitude of different behavioral games and phenomenon. |
| Keywords: | other-regarding preferences, altruism, cooperation, evolution, reciprocity, welfare-tradeoff-ratio |
| JEL: | C71 C73 C90 C91 D63 D64 |
| Date: | 2011–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:02-05&r=upt |
| By: | Klemens Keldenich; Marcus Klemm |
| Abstract: | This paper investigates the behavior of contestants in the game show “Quiz Taxi” when faced with the decision whether to bet the winnings they have acquired on a fi nal “double or nothing” question. The decision is made by groups of two or three persons. This set-up enables the decision making process to be studied by observing group communication. There is a strong correlation between communication content and the fi nal choice, indicating that, from the contestant‘s perspective, the decisions are rational and that the context is an important factor in the fi nal decision. This is particularly so for individual valuations of the money at stake. More extensive discussions help to make the right decision. As contestants do not apply to go on the show, they represent a less selected sample than those in previous game show studies. Overall, the contestants show risk averse behavior, suggesting CRRA-parameters larger than 1. The study also shows some heterogeneity in attitude to risk. Contestants who do better in the show are more likely to go for the risky option, because they are more knowledgeable and more confi dent. All-female groups are less likely and three-person groups more likely to choose the risky option. |
| Keywords: | Risk attitude; game show; communication; group decision |
| JEL: | C93 D70 D81 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0278&r=upt |
| By: | Congleton, Roger D. |
| Abstract: | This paper provides a rational choice-based analysis of the causes and consequences of surprise events. The paper argues that ignorance may be rational, but nonetheless produce systematic mistakes, inconsistent behavior, and both pleasant and unpleasant surprises. If ignorance and unpleasant surprises are commonplace and relevant for individual and group decisionmaking, we should observe standing institutions for dealing with them - and we do. Insofar as surprises are consistent with rational choice models, but left outside most models, it can be argued that these methodological choices mistakenly limit the scope of rational choicebased research. -- |
| Keywords: | Ignorance,Rational Ignorance,Natural Ignorance,Bounded Rationality,Rational Choice,Biased Expectations,Crisis Management,Social Insurance,Bailouts,Economics of Information |
| JEL: | D8 D6 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ciwdps:62011&r=upt |
| By: | Oksana Tokarchuk |
| Abstract: | The direction of speed-up – delay effect is reversed in elicitation with choice task in MPL format. The model of intertemporal choice with reference point cannot explain this reversal. I claim that this reversal is due to the structure of elicitation task |
| Keywords: | intertemporal choice, MPL, choice task, framing. |
| JEL: | C91 D90 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:trt:disawp:2011/10&r=upt |