nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2012‒05‒22
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Ambiguity Revealed By Subir Bose; Matthew Polisson; Ludovic Renou
  2. Black swan protection: an experimental investigation By Morone, Andrea; Ozdemir, Ozlem
  3. Risk attitudes and private business equity By Fossen, Frank M.
  4. Behavioral multistate duration models. What should they look like? By John K. Dagsvik
  5. Risk Premium, Variance Premium and the Maturity Structure of Uncertainty By Bruno Feunou; Jean-Sébastien Fontaine; Abderrahim Taamouti; Roméo Tedongap
  6. Revisiting Procedural Utility: Evidence from European Survey Data By Stefan Schneck
  7. Expectations as reference points: field evidence from experienced subjects in a competitive, high-stakes environment By Björn Bartling; Leif Brandes; Daniel Schunk
  8. On the sources of risk preferences in rural Vietnam By Dang, Duc Anh

  1. By: Subir Bose; Matthew Polisson; Ludovic Renou
    Abstract: We derive necessary and suffcient conditions for data sets composed of state-contingent prices and consumption to be consistent with two prominent models of decision making under ambiguity: variational preferences and smooth ambiguity. The revealed preference conditions for the maxmin expected utility and subjective expected utility models are characterized as special cases.
    Keywords: Ambiguity; revealed preference; maxmin; variational preferences; expected utility; smooth; uncertainty
    Date: 2012–04
  2. By: Morone, Andrea; Ozdemir, Ozlem
    Abstract: This experimental study investigates insurance decisions in low-probability, high-loss risk situations. Results indicate that subjects consider the probability of loss (loss size) when they make buying decisions (paying decisions). Most individuals are risk averse with no specific threshold probability.
    Keywords: Black swan; Risk; Insurance; Low probability; High loss; Experiment
    JEL: D81 C91
    Date: 2012
  3. By: Fossen, Frank M.
    Abstract: Why do people engage in entrepreneurship and commit large parts of their personal wealth to their business, despite comparably low returns and high risk? This paper connects several streams of literature to shed some light on this puzzle and suggests possible future research avenues. Key insights from the literature are that entrepreneurs may operate in imperfect financial markets and that entrepreneurs are less risk-averse than the rest of the population. A focus of this paper is, therefore, on the role of heterogeneous risk attitudes in entrepreneurial decisions, specifically portfolio choice and the entry and exit decisions. Nonpecuniary benefits of entrepreneurship, such as being independent in the workplace, also contribute to an explanation of entrepreneurial behavior. --
    Keywords: entrepreneurship,risk aversion,portfolio choice
    JEL: J23 G11 L26
    Date: 2012
  4. By: John K. Dagsvik (Statistics Norway)
    Abstract: This paper discusses how specification of probabilistic models for multistate duration data generated by individual choices should be justified on a priori theoretical grounds. Preferences are assumed represented by random utilities, where utilities are viewed as random also to the agent himself. First, the paper proposes a characterization of exogenous preferences, (that is, in the special case with no state dependence effects). The main assumption asserts that when preferences are exogenous the current and future indirect utilities are uncorrelated with current and past choices, given unobservables that are perfectly known to the agent. It is demonstrated that under rather weak and general regularity conditions this characterization yields an explicit structure of the utility function as a so-called Extremal stochastic process. Furthermore, from this utility representation it follows that the choice process is a Markov Chain (in continuous- or discrete time), with a particular functional form of the transition probabilities, as explicit functions of the parameters of the utility function and choice set. Subsequently, we show how the model can be extended to allow for structural state dependence effects, and how such state dependence effects can be identified. Moreover, it is discussed how a version of Chamberlain’s conditional estimation method applies in the presence of fixed effects. Finally, we discuss two examples of applications.
    Keywords: Duration models; Random utility models; Habit persistence; True state dependence; Extremal process; Markov chain
    JEL: C23 C25 C41 C51 D01
    Date: 2012–05
  5. By: Bruno Feunou; Jean-Sébastien Fontaine; Abderrahim Taamouti; Roméo Tedongap
    Abstract: Expected returns vary when investors face time-varying investment opportunities. Longrun risk models (Bansal and Yaron 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton 2000) emphasize sources of risk that are not observable to the econometrician. We show that, for both classes of models, the term structure of risk implicit in option prices can reveal these risk factors ex-ante. Empirically, we construct the variance term structure implied in SP500 option prices. The variance term structure reveal two important drivers of the bond premium, the equity premium, and the variance premium, jointly. We also consider the term structure of higher-order risks as measured by skewness and kurtosis and still find that two factors are sufficient to summarize the information content from the term structure of risks. Overall, our results bode well for the ability of structural models to explain risk-returns trade-offs across different markets using only very few sources of risk.
    Keywords: Asset Pricing; Financial services
    JEL: G12 G13
    Date: 2012
  6. By: Stefan Schneck
    Abstract: This research note presents cross-country evidence that job satisfaction is higher for self-employed than for employees. The examination, however, does not stop at this point and examines the reasons why this is the case. Using data on 25 European countries, we can show that individuals seem to derive utility from the way outcomes are achieved. In other words, our results are in line with procedural utility theory (Benz and Frey, 2004, 2008). -- Dieser Beitrag zeigt, dass die Zufriedenheit mit dem Beruf bei Selbstständigen größer ist als bei abhängig Beschäftigten. Die Analyse bezieht sich auch auf die Gründe für diese Beobachtung. Es werden Daten aus 25 europäischen Ländern herangezogen mit denen gezeigt wird, dass Personen nicht nur Nutzen aus den Resultaten ihrer Arbeit erzielen, sondern auch aus der Bewältigung der Ziele. Dieses Ergebnis stimmt mit der 'procedural utility' Theorie (Benz und Frey, 2004, 2008) überein.
    Keywords: Self-employment,job satisfaction,procedural utility
    JEL: J81 L22 L29 M54
    Date: 2012–05–16
  7. By: Björn Bartling; Leif Brandes; Daniel Schunk
    Abstract: We show that professional soccer players exhibit reference-dependent behavior during matches. Controlling for the state of the match and for unobserved heterogeneity, we show on a minute-by-minute basis that a player breaches the rules of the game, measured by the referee’s assignment of cards, with a significantly higher probability if his team is behind the expected match outcome, measured by pre-play betting odds of large professional bookmakers. We derive these results in two independent data sets, one from ten seasons of the German Bundesliga, the other from eight seasons the English Premier League, each with more than half a million minutes of play.
    Keywords: Reference points, expectations, experience, high stakes, competition
    JEL: D03 D81 D84 L83
    Date: 2012–05
  8. By: Dang, Duc Anh
    Abstract: In this paper, I provide a new empirical evidence that natural environment can shape individual risk preferences. By combining historical data on climate variation and contemporary survey questions on risk aversion, I find that risk aversion is significantly different for people who live in areas that have suffered high frequency of natural disasters. In particular, individuals highly affected by climate volatility show a long term risk aversion. The finding also supports the hypothesis that when people used to live in risky environment, an incremental increase in risk affects their risk preferences less.
    Keywords: Climate variation, risk aversion, Vietnam
    JEL: D03 O53 Q54
    Date: 2012–04

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