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on Utility Models and Prospect Theory |
| By: | Wuerth, A.M.; Schumacher, J.M. (Tilburg University) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-5241371&r=upt |
| By: | Glenn W. Harrison; J. Todd Swarthout |
| Abstract: | Developments in the theory of risk require yet another evaluation of the behavioral validity of the independence axiom. This axiom plays a central role in most formal statements of expected utility theory, as well as popular alternative models of decision-making under risk, such as rank-dependent utility theory. It also plays a central role in experiments used to characterize the way in which risk preferences deviate from expected utility theory. If someone claims that individuals behave as if they "probability weight" outcomes, and hence violate the independence axiom, it is invariably on the basis of experiments that must assume the independence axiom. We refer to this as the Bipolar Behavioral Hypothesis: behavioral economists are pessimistic about the axiom when it comes to characterizing how individuals directly evaluate two lotteries in a binary choice task, but are optimistic about the axiom when it comes to characterizing how individuals evaluate multiple lotteries that make up the incentive structure for a multiple-task experiment. Building on designs that have a long tradition in experimental economics, we offer direct tests of the axiom and the evidence for probability weighting. We reject the Bipolar Behavioral Hypothesis: we find that nonparametric preferences estimated for the rank-dependent utility model are significantly affected when one elicits choices with procedures that require the independence assumption, as compared to choices with procedures that do not require that assumption. We also demonstrate this result with familiar parametric preference specifications, and draw general implications for the empirical evaluation of theories about risk. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2012-01&r=upt |
| By: | David Dillenberger; Andrew Postlewaite; Kareen Rozen |
| Date: | 2012–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000353&r=upt |
| By: | Franziska Brecht; Oliver Günther; Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Ksenia Koroleva |
| Abstract: | The paradigm of bounded rationality considers the limited ability of individuals to make consistent and rational choices. Due to the scarcity of research on this phenomenon in information systems, we conducted an experimental study investigating decision-making regarding risk preferences and social preferences. Moreover, we explored the stability of these preferences under different conditions and uncovered the role of information retrieval in individual decision-making. We find that although individuals are generally risk-averse and egoistic, none of these preferences is stable under the conditions tested which provides indices of boundedly rational decision-making. Although the information retrieved by participants generally allows to infer their preferences, the increasing amount and complexity of this information again often results in boundedly rational behavior. |
| Keywords: | bounded rationality, experimental design, information retrieval, stability of attitudes and behavior, cognitive tracing, behavioral economics, behavioral information systems |
| JEL: | C18 C91 D03 D81 |
| Date: | 2012–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2011-065&r=upt |
| By: | Ulrich Schmidt |
| Abstract: | Empirical evidence has shown that people are unwilling to insure rare losses at subsidized premiums and at the same time take-up insurance for moderate risks at highly loaded premiums. This paper explores whether prospect theory, in particular diminishing sensitivity and loss aversion, can accommodate this evidence. A crucial factor for applying prospect theory to insurance problems is the choice of the reference point. We motivate and explore two possible reference points, state-dependent initial wealth and final wealth after buying full insurance. It turns out that particularly the latter reference point seems to provide a realistic explanation of the empirical evidence |
| Keywords: | insurance demand, prospect theory, flood insurance, diminishing sensitivity, loss aversion |
| JEL: | D14 D81 G21 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1750&r=upt |
| By: | Rose-Anne Dana (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine) |
| Abstract: | In finite markets with short-selling, conditions on agents' utilities insuring the existence of efficient allocations and equilibria are by now well understood. In infinite markets, a standard assumption is to assume that the individually rational utility set is compact. Its drawback is that one does not know whether this assumption holds except for very few examples as strictly risk averse expected utility maximizers with same priors. The contribution of the paper is to show that existence holds for the class of strictly concave second order stochastic dominance preserving utilities. In our setting, it coincides with the class of strictly concave law-invariant utilities. A key tool of the analysis is the domination result of Lansberger and Meilijson that states that attention may be restricted to comonotone allocations of aggregate risk. Efficient allocations are characterized as the solutions of utility weighted problems with weights expressed in terms of the asymptotic slopes of the restrictions of agents' utilities to constants. The class of utilities which is used is shown to be stable under aggregation. |
| Keywords: | Law invariant utilities, comonotonicity, Pareto efficiency, equi- libria with short-selling, aggregation, representative agent |
| Date: | 2011–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00655172&r=upt |
| By: | Richard Cornes; Roger Hartley |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1204&r=upt |
| By: | Marco Frittelli; Marco Maggis; Ilaria Peri |
| Abstract: | We propose a generalization of the classical notion of the $V@R_{\lambda}$ that takes into account not only the probability of the losses, but the balance between such probability and the amount of the loss. This is obtained by defining a new class of law invariant risk measures based on an appropriate family of acceptance sets. The $V@R_{\lambda}$ and other known law invariant risk measures turn out to be special cases of our proposal. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1201.2257&r=upt |
| By: | Eric Fesselmeyer; Leonard J. Mirman; Marc Santugini |
| Abstract: | We show that a large number of agents sharing risk does not remove concern for risk (through risk spreading) when entrepreneurial activity is not insignificant in the economy. |
| Keywords: | Arrow-Lind Theorem, Entrepreneurial activity, Portfolio diversification, Risk-aversion, Risk-neutrality, Risk-taking |
| JEL: | D81 G10 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1201&r=upt |