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on Utility Models and Prospect Theory |
| By: | Douadia Bougherara; Xavier Gassmann; Laurent Piet |
| Abstract: | We designed an artefactual field experiment involving real payments to elicit French farmers’ risk preferences. We test for two descriptions of farmers’ behaviour: expected utility and cumulative prospect theory and for preference stability across context (price risk and yield risk). We use multiple price lists where farmers make series of choices between two lotteries with varying probabilities and outcomes in the gain and loss domains. We estimate parameters describing farmers’ risk preferences derived from structural models. We find farmers are slightly risk averse in the expected utility framework. In the cumulative prospect theory frame, we find farmers display either loss aversion or probability weighting, tending to overweight small probabilities and to underweight high probabilities. We also estimate the reference point and find it not significantly different from zero. Cumulative prospect theory is a better description of farmers’ risk attitudes. We find risk preferences vary across context. |
| Keywords: | risk attitudes, field experiment, farmer |
| JEL: | C93 D81 Q10 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rae:wpaper:201106&r=upt |
| By: | Antoni Bosch-Domènech; Joaquim Silvestre |
| Abstract: | Various experimental procedures aimed at measuring individual risk aversion involve a list of pairs of alternative prospects. We first study the widely used method by Holt and Laury (2002), for which we find that the removal of some items from the lists yields a systematic decrease in risk aversion. This bias is quite distinct from other confounds that have been previously observed in the use of the Holt and Laury method. It may be related to empirical phenomena and theoretical developments where better prospects increase risk aversion. Nevertheless, we have also found that the more recent elicitation method due to Abdellaoui et al. (2011), also based on lists, does not display any statistically significant bias when the corresponding items of the list are removed. Our results suggest that methods other than the popular Holt and Laury one may be preferable for the measurement of risk aversion. |
| Keywords: | Risk preferences, measurement of risk, experiments |
| JEL: | C91 D03 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:634&r=upt |
| By: | Thierry Madiès (Department of Economics - University of Fribourg - University of Fribourg); Marie-Claire Villeval (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Malgorzata Wasmer (Department of Economics - University of Fribourg - University of Fribourg) |
| Abstract: | We study the attitudes of junior and senior employees towards strategic uncertainty and competition, by means of a market entry game inspired by Camerer and Lovallo (1999). Seniors exhibit higher entry rates compared to juniors, especially when earnings depend on relative performance. This difference persists after controlling for attitudes towards non-strategic uncertainty and for beliefs on others' competitiveness and ability. Social image matters, as evidenced by the fact that seniors enter more when they predict others enter more and when they are matched with a majority of juniors. This contradicts the stereotype of risk averse and less competitive older employees. |
| Keywords: | Aging; risk; ambiguity; competitiveness; self-image; confidence; experiment |
| Date: | 2012–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00702579&r=upt |
| By: | Daniel Hern\'andez-Hern\'andez; Leonel P\'erez-Hern\'andez |
| Abstract: | In this paper the robust utility maximization problem for a market model based on L\'evy processes is analyzed. The interplay between the form of the utility function and the penalization function required to have a well posed problem is studied, and for a large class of utility functions it is proved that the dual problem is solvable as well as the existence of optimal solutions. The class of equivalent local martingale measures is characterized in terms of the parameters of the price process, and the connection with convex risk measures is also presented. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.0715&r=upt |
| By: | Michail Anthropelos |
| Abstract: | We consider the market of n financial agents who aim to increase their expected utilities by sharing their random incomes. Given the optimal sharing rules, we address the situation where agents do not share their true random endowments, but instead they report as endowments the random quantities that maximize their expected utility when the sharing rules are applied. It is shown that this strategic behavior results in a Nash-equilibrium type of agreement among the agents, which implies an inefficient risk sharing. Under quadric utility functionals, we give closed form solutions for this Nash equilibrium and discuss the associated findings. The effect of a similar agents' strategic behavior is studied in the oligopoly over-the- counter market of finite financial securities, whose equilibrium prices are determined by the equality of demand and supply. The resulting risk sharing inefficiency is even more intense if the agents' participation in the market becomes an endogenous problem. Regarding this issue, we give conditions under which the participation of an extra agent is bene?ficial for all the existed ones. This discussion naturally leads to the problem of sub-group formation in the market, which is addressed for the ?first time in a financial risk sharing literature. A related example under quadratic utility functionals is extensively analyzed. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1206.0384&r=upt |
| By: | Mikołaj Czajkowski (University of Warsaw, Faculty of Economic Sciences); Marek Giergiczny (University of Warsaw, Faculty of Economic Sciences); William H. Greene (New York University, Stern School of Business, Department of Economics) |
| Abstract: | Using multiple choice tasks per respondent in discrete choice experiment studies increase the amount of available information. However, treating repeated choice data in the same way as cross-sectional data may lead to biased estimates. In particular, respondents’ learning and fatigue may lead to changes in observed utility function preference (taste) parameters, as well as its error term variance (scale). Substantial body of empirical research offers mixed evidence in terms of whether (and which) of these ordering effects are observed. In this study we point to a significant component in explaining these differences – we show how accounting for unobservable preference and scale heterogeneity can influence the magnitude of observed ordering effects, especially if combined with too few choice tasks used for the analysis. We do this by utilizing the state-of-the-art modeling methods (H-MNL, S-MNL, H-RPL, G-MNL) which we modify to accommodate choice task specific scale parameter. In addition, we investigate possible bias resulting from not accounting for ordering effects. Our empirical study was based in the context of environmental protection – management changes in the protection of Polish forests. |
| Keywords: | ordering effects, learning, fatigue, preference and scale heterogeneity, forest management, recreation, biodiversity |
| JEL: | Q51 Q23 Q26 Q57 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2012-08&r=upt |
| By: | Helga Habis (Institute of Economics, Hungarian Academy of Sciences Department of Microeconomics, Corvinus University of Budapest); P. Jean-Jacques Herings (Department of Economics, Universiteit Maastricht) |
| Abstract: | We study bankruptcy games where the estate and the claims have stochastic values. We use the Weak Sequential Core as the solution concept for such games.We test the stability of a number of well known division rules in this stochastic setting and find that most of them are unstable, except for the Constrained Equal Awards rule, which is the only one belonging to the Weak Sequential Core. |
| Keywords: | transferable utility games, uncertainty, weak sequential core, bankruptcy games |
| JEL: | C71 C73 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1205&r=upt |
| By: | Arthur Lewbel (Boston College); Krishna Pendakur (Simon Fraser University) |
| Abstract: | We propose a generalization of random coefficients models, in which the regression model is an unknown function of a vector of regressors, each of which is multiplied by an unobserved error. We also investigate a more restrictive model which is additive (or additive with interactions) in unknown functions of each regressor multiplied by its error. We show nonparametric identification of these models. In addition to providing a natural generalization of random coefficients, we provide economic motivations for the model based on demand system estimation. In these applications, the random coefficients can be interpreted as random utility parameters that take the form of Engel scales or Barten scales, which in the past were estimated as deterministic preference heterogeneity or household technology parameters. We apply these results to consumer surplus and related welfare calculations. |
| Keywords: | Unobserved heterogeneity; Nonseparable errors; Random utility parameters; Random coefficients; Equivalence scales; Consumer surplus; Welfare calculations |
| JEL: | C14 D12 D13 C21 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp12-13&r=upt |
| By: | Mikołaj Czajkowski (University of Warsaw, Faculty of Economic Sciences); Nick Hanley (University of Stirling, Economics Division) |
| Abstract: | For many years, stated preference researchers have been interested in the effects of information on willingness to pay for environmental goods. Within the random utility model, information about an environmental good might impact on preferences and on scale (error variance), both between and within samples of choices. In this paper, we extend the G-MNL model to investigate the effects of different information sets on choices over the management of biodiversity in the UK, looking specifically at moorlands managed for red grouse shooting. Specifically, we make the individual scale parameter a function of observable (dataset-specific) characteristics. Our results show that changing information sets results in significant differences in the mean scale between datasets, and in the variance of scale. Respondents are more deterministic in their choices and show lower within-sample scale heterogeneity in the alternative information treatment. Changes in information provision also effect willingness to pay estimates, reducing the value people place on the conservation of two iconic birds of prey. The methods used will also be of interest to researchers who need to combine choice experiment data sets. |
| Keywords: | choice modelling, information effects, scale, scale heterogeneity, G-MNL, heather moorland management, raptor conservation, combined SP-RP |
| JEL: | C59 C81 Q51 Q57 Q15 D12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2012-10&r=upt |