|
on Utility Models and Prospect Theory |
| By: | David Dillenberger (Department of Economics, University of Pennsylvania); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Kareen Rozen (Department of Economics, Yale University) |
| Abstract: | Savage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other .expected utility.representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM.s preferences to be defined on both subjective acts and objective lotteries, we show how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes. |
| Keywords: | Subjective expected utility, optimism, pessimism, stake-dependent probability |
| JEL: | D80 D81 |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:11-036&r=upt |
| By: | Richard Watt |
| Abstract: | This paper characterizes downside risk aversion in a simple and intuitive manner. It is shown that using this characterization one can simplify considerably a theorem by Jindapon (2010) relating to greater downside risk aversion as measured by the prudence probability premium. The comparative statics of downside risk aversion in risk-free wealth are also considered. |
| Keywords: | downside risk aversion, prudence |
| JEL: | D8 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:17-2011&r=upt |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Diego Nocetti (CIMS - Courant Institute of Mathematical Science - New York University) |
| Abstract: | In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the effect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution effect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our definition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences. |
| Keywords: | matrix-measure, multivariate prudence, comparative prudence, multivariate downside risk aversion, downside risk aversion, multivariate preferences |
| Date: | 2011–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00635558&r=upt |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Diego Nocetti (CIMS - Courant Institute of Mathematical Science - New York University) |
| Abstract: | In this paper we analyse the risk attitude of a group of heterogenous agents and we develop a theory of comparative collective risk tolerance. In particular, we characterize how shifts in the distribution of individual levels of risk tolerance affect the representative agent's degree of risk tolerance. In the model with efficient risk – sharing and two agents (e.g. a household) with isoelastic preferences we show that an increase of the level of risk tolerance of one of the agents might have an ambiguous impact on the aggregate level of risk tolerance; the latter increases for some levels of aggregate wealth while it decreases for other levels of aggregate wealth. Specifically, there are two possible shapes for aggregate risk tolerance as a function of the risk tolerance level of one of the agents: increasing curve or increasing then decreasing curve. For more general populations we characterize the effect of first order like shifts (individual levels of risk tolerance more concentrated on high values) and second order like shifts (more dispersion on individual levels of risk tolerance) on the collective level of risk tolerance. We also evaluate how shifts in the distribution of individual levels of risk tolerance impact the collective level of risk tolerance in a framework with exogenous egalitarian sharing rules. Our results permit to better characterize differences in risk taking behavior between groups and individuals and among groups with different distribution of risk preferences. |
| Keywords: | heterogenous agents, collective risk, risk tolerance, isoelastic preferences, aggregate wealth, risk preferences |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00559137&r=upt |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | In this paper, we show that behavioral features can be obtained at a group level when the individuals of the group are heterogeneous enough. Starting from a standard model of Pareto optimal allocations, with expected utility maximizers but allowing for heterogeneity among individual beliefs, we show that the representative agent has an inverse S-shaped probability distortion function. As an application of this result, we show that an agent with a probability weighting function as in Cumulative Prospect Theory may be represented as a collection of agents with noisy beliefs. |
| Keywords: | Behavioral agent; probability weighting function; representative agent |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00550229&r=upt |
| By: | Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Robert-Vincent Joule (LPS-AIX - Laboratoire de Psychologie Sociale - Université de Provence - Aix-Marseille I : EA849); Stephane Luchini (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Jason Shogren (Departement Economy and Finance, University of Wyoming - University of Wyoming) |
| Abstract: | Hypothetical bias is a long-standing issue in stated preference and contingent valuation studies - people tend to overstate their preferences when they do not experience the real monetary consequences of their decision. This view, however, has been challenged by recent evidence based on the elicitation of induced values (IV) in the lab and homegrown (HG) demand function from different countries. This paper uses an experimental design to assess the extent and relevance of hypothetical bias in demand elicitation exercises for both IV and HG values. For testbed purpose, we use a classic second-price auction to elicit preferences. Comparing the demand curve we elicit in both, hypothetical bias unambiguously (i) vanishes in an induced-value, private good context, and (ii) persists in homegrown values elicitation context. This suggests hypothetical bias in preference elicitation appears to be driven by "preference formation" rather than "preference elicitation". In addition, companion treatments highlight two sources of the discrepancy observed in the HG setting: the hypothetical context leads bidders to underestimate the constraints imposed by their budget limitations, whereas the real context creates pressure leading them to bid "zero" to opt out from the elicitation mechanism. As a result, there is a need for a demand elicitation procedure that helps subjects take the valuation exercise sincerely, but without putting extra pressure on them. |
| Keywords: | Auctions; Demand revelation; Experimental valuation; Hypothetical bias |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00526134&r=upt |
| By: | Elias Albagli; Christian Hellwig; Aleh Tsyvinski |
| Abstract: | We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different realization of the underlying shocks to satisfy the market-clearing condition. This identity shift amplifies the impact of price on the marginal trader's expectations. We derive tight characterization for both the conditional and the unconditional expected wedges. Our first main theorem shows how the sign of the expected wedge (that is, the difference between the expected price and the dividends) depends on the shape of the dividend payoff function and on the degree of informational frictions. Our second main theorem provides conditions under which the variability of prices exceeds the variability for realized dividends. We conclude with two applications of our theory. First, we highlight how heterogeneous information can lead to systematic departures from the Modigliani-Miller theorem. Second, in a dynamic extension of our model we provide conditions under which bubbles arise. |
| JEL: | E44 G12 G14 G30 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17548&r=upt |
| By: | Peter Brooks; Simon Peters; Horst Zank |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1123&r=upt |
| By: | Mandell, Svante (VTI); Nyström, Johan (VTI) |
| Abstract: | Earlier theoretical models of unbalanced bidding in unit price contracts (UPC) ofter predict corner solutions, i.e. zero bids for unit prices of expected overextimated quantities. However, anecdotal evidence indicates a lack of zero bids in the actual contracts. We pursue a possible explanation for this anomaly in risk-aversion of the contractor. Using a simple model we show that a contractor with superior information may exploit this in the bidding process to increase her expectd revenue. However, in so doing she increases her risk exposure. If the contractor is risk-averse, she typically will avoid a corner solution to this risk vs. expected return trade-off. |
| Keywords: | Unbalanced bidding; risk; modelling; unit price contraction; public procurement |
| JEL: | D82 D86 H51 L51 |
| Date: | 2011–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2011_013&r=upt |
| By: | Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX) |
| Abstract: | Analysis of the tender offer premiums and of the means of payment should not be done separately. In the empirical literature these two variables are often considered independently although they may have endogenous relation in a contractual setting. Using a sample of European M&As over the 2000-2010 decade, we show that these two variables are jointly set in a contractual empirical approach. The relationship between the percentage of cash and the offer premium is positive: higher premiums will yield payments with more cash. We highlight that the payment choice is not a continuum between full cash and full share payment. Two different regimes of payment in M&A transactions are empirically characterized. We analyze the major determinants of M&A terms when the offer premium and the means of payment are jointly set. The underlying rationale of asymmetry of information and risk sharing calculus is found significant in the setting of the agreement. |
| Keywords: | M&A, takeover premium, means of payment, contract setting |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00636614&r=upt |
| By: | Keisler, H. Jerome; Lee, Byung Soo |
| Abstract: | In this paper, we provide an epistemic characterization of iterated admissibility (IA), i.e., iterated elimination of weakly dominated strategies. We show that rationality and common assumption of rationality (RCAR) in complete lexicographic type structures implies IA, and that there exist such structures in which RCAR can be satisfied. Our result is unexpected in light of a negative result in Brandenburger, Friedenberg, and Keisler (2008) (BFK) that shows the impossibility of RCAR in complete continuous structures. We also show that every complete structure with RCAR has the same types and beliefs as some complete continuous structure. This enables us to reconcile and interpret the difference between our results and BFK’s. Finally, we extend BFK’s framework to obtain a single structure that contains a complete structure with an RCAR state for every game. This gives a game-independent epistemic condition for IA. |
| Keywords: | Epistemic game theory; rationality; admissibility; iterated weak dominance; assumption; completeness; Borel Isomorphism Theorem; o-minimality |
| JEL: | D80 C72 |
| Date: | 2011–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34441&r=upt |