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on Utility Models and Prospect Theory |
| By: | Eichberger, Jürgen; Oechssler, Jörg; Schnedler, Wendelin |
| Abstract: | As illustrated by the famous Ellsberg paradox, many subjects prefer to bet on events with known rather than with unknown probabilities, i.e., they are ambiguity averse. In an experiment, we examine subjects’ choices when there is an additional source of ambiguity, namely, when they do not know how much money they can win. Using a standard independence assumption, we show that ambiguity averse subjects should continue to strictly prefer the urn with known probabilities. In contrast, our results show that many subjects no longer exhibit such a strict preference. This should have important ramifications for modeling ambiguity aversion. |
| Keywords: | ambiguity aversion; uncertainty; minmax-expected utility |
| JEL: | D81 C91 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0528&r=upt |
| By: | Arthur Charpentier; Alfred Galichon; Marc Henry |
| Abstract: | We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. Using martingale embedding techniques, we show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina's result in [18]. To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility of [10], we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given in [17] still holds in the multivariate case. <P> |
| Keywords: | local utility, multivariate risk aversion, multivariate rank dependent utility, pessimism, multivariate Bickel-Lehmann dispersion, |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2012s-17&r=upt |
| By: | Larbi Alaoui |
| Abstract: | There are many situations in which individuals have a choice of whether or not to observe eventual outcomes. In these instances, individuals often prefer to remain ignorant. These contexts are outside the scope of analysis of the standard von Neumann-Morgenstern (vNM) expected utility model, which does not distinguish between lotteries for which the agent sees the final outcome and those for which he does not. I develop a simple model that admits preferences for making an observation or for remaining in doubt. I then use this model to analyze the connection between preferences of this nature and risk-attitude. This framework accommodates a wide array of behavioral patterns that violate the vNM model, and that may not seem related, prima facie. For instance, it admits self-handicapping, in which an agent chooses to impair his own performance. It also accommodates a status quo bias without having recourse to framing effects, or to an explicit definition of reference points. In a political economy context, voters have strict incentives to shield themselves from information. In settings with other-regarding preferences, this model predicts observed behavior that seems inconsistent with either altruism or self-interested behavior. |
| Keywords: | Value of information, uncertainty, recursive utility, doubt, unobserved outcomes, unresolved lotteries |
| JEL: | D03 D80 D81 D64 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1313&r=upt |
| By: | Paolo Ghirardato; Marciano Siniscalchi |
| Abstract: | This paper considers local and global multiple-prior representations of ambiguity for preferences that are (i) monotonic, (ii) Bernoullian, i.e. admit an affine utility representation when restricted to constant acts, and (iii) locally Lipschitz continuous. We do not require either Certainty Independence or Uncertainty Aversion. We show that the set of priors identified by Ghirardato, Maccheroni, and Marinacci (2004)’s ‘unambiguous preference’ relation can be characterized as a union of Clarke differentials. We then introduce a behavioral notion of ‘locally better deviation’ at an act, and show that it characterizes the Clarke differential of the preference representation at that act. These results suggest that the priors identified by these preference statements are directly related to (local) optimizing behavior. |
| Keywords: | Ambiguity, Optimization, Robustness, Derivative. |
| JEL: | D81 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:255&r=upt |
| By: | Gheyssens, Jonathan; Gunther, Isabel |
| Abstract: | The aim of this paper is to expand our knowledge on risk aversion among the poor by conducting experiments that do not only test risk aversion in small and large stakes but also in risky gains and risky losses. To our knowledge, this is the first attempt |
| Keywords: | risk aversion; loss aversion; religion |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-38&r=upt |
| By: | Antonio Nicita; Matteo Rizzolli |
| Abstract: | The standard model of optimal deterrence predicts that the probability of wrongful conviction of the innocent is, at the margin, as detrimental to deterrence as the wrongful acquittal of guilty individuals. We extend the model in several directions: using expected utility as well as nonexpected utility to consider the role of risk aversion, non-linear probability weighting and loss aversion. We also consider how relevant emotions such as guilt, shame and indignation play out. Several of these factors support the intuition that wrongful convictions of the innocent do have a larger detrimental impact on deterrence and thus the policy implications are reconciled with the widely shared maxim in dubio pro reo. We then draw some theoretical implications such as a novel justification for the different standards of proof in criminal vs civil law as well as other policy implications. |
| Keywords: | wrongful convictions, Type I errors, wrongful acquittals, Type II errors, evidence, optimal under-deterrence, behavioral economics, risk aversion, loss aversion, prospect theory, prelec function |
| JEL: | K14 K41 K42 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:637&r=upt |
| By: | Lionel Page; David Savage; Benno Torgler |
| Abstract: | This study explores people's risk attitudes after having suffered large real-world losses following a natural disaster. Using the margins of the 2011 Australian oods (Brisbane) as a natural experimental setting, we find that homeowners who were victims of the floods and face large losses in property values are 50% more likely to opt for a risky gamble - a scratch card giving a small chance of a large gain ($500,000) - than for a sure amount of comparable value ($10). This finding is consistent with prospect theory predictions of the adoption of a risk-seeking attitude after a loss. |
| Keywords: | Decision under risk; large losses; natural experiment |
| JEL: | D03 D81 C93 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2012-07&r=upt |
| By: | Jose Apesteguia; Miguel A. Ballester |
| Abstract: | We propose a rule of decision-making, the sequential procedure guided by routes, and show that three influential boundedly rational choice models can be equivalently understood as special cases of this rule. In addition, the sequential procedure guided by routes is instrumental in showing that the three models are intimately related. We show that choice with a status-quo bias is a refinement of rationalizability by game trees, which, in turn, is also a refinement of sequential rationalizability. Thus, we provide a sharp taxonomy of these choice models, and show that they all can be understood as choice by sequential procedures. |
| Keywords: | Individual rationality, Bounded rationality, Behavioral economics. |
| JEL: | D01 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1309&r=upt |
| By: | Zhidong Bai (KLASMOE and School of Mathematics and Statistics, Northeast Normal University, Department of Statistics and Applied Probability and Risk Management Institute, National University of Singapore); Hua Li (Department of Statistics and Applied Probability, National University of Singapore); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.); Wing-Keung Wong (Department of Economics, Hong Kong Baptist University) |
| Abstract: | We derive the limiting process of the stochastic dominance statistics for risk averters as well as for risk seekers when the underlying processes might be dependent or independent. We take account of the dependency of the partitions and propose a bootstrap method to decide the critical point. In addition, we illustrate the applicability of the stochastic dominance statistics for both risk averters and risk seekers to analyze the dominance relationship between the Chinese and US stock markets in the entire period as well as the sub-periods before and after the ¯nancial crises, including the internet bubble and the recent sub-prime crisis. The ¯ndings could be used to draw inferences on the preferences of risk averters and risk seekers in investing in the Chinese and US stock markets. The results also enable us to examine whether there is any arbitrage opportunity in these markets and whether these markets are e±cient and investors are rational. |
| Keywords: | Stochastic dominance, risk aversion, risk seeking, test statistic, hypothesis testing. |
| JEL: | C12 G1 G12 G15 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1213&r=upt |
| By: | Fabrizio Germano; Peio Zuazo-Garin |
| Abstract: | We extend Aumann's theorem [Aumann, 1987] deriving correlated equilibria as a consequence of common priors and common knowledge of rationality by explicitly allowing for non-rational behavior. We replace the assumption of common knowledge of rationality with a substantially weaker notion, joint p-belief of rationality, where agents believe the other agents are rational with probability p or more. We show that behavior in this case constitutes a constrained correlated equilibrium of a doubled game satisfying certain p-belief constraints and characterize the topological structure of the resulting set of p-rational outcomes. We establish continuity in the parameter p and show that, for p sufficiently close to one, the p-rational outcomes are close to the correlated equilibria and, with high probability, supported on strategies that survive the iterated elimination of strictly dominated strategies. Finally, we extend Aumann and Dreze's theorem [Aumann and Dreze, 2008] on rational expectations of interim types to the broader p-rational belief systems, and also discuss the case of non-common priors. |
| Keywords: | correlated equilibrium, approximate common knowledge, bounded rationality, p-rational belief system, common prior, information, noncooperative game |
| JEL: | C72 D82 D83 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1326&r=upt |
| By: | Georges Prat; Remzi Uctum |
| Abstract: | Using Consensus Economics survey data on experts' expectations, we aim to model the 3- and 12-month ahead ex-ante risk premia on the Yen/USD and the British Pound/USD exchange markets. For each market and at a given horizon, we show that the risk premium is well determined by the conditional expected variance of the change in the real exchange rate, agents' real net market position in assets and a constant composite risk aversion coefficient, as suggested by a two-country portfolio asset pricing model. The expected variance depends on the past values of the observed variance and the unobservable real net market position is estimated as a state variable using the Kalman filter methodology. We found that the trends of our estimated horizon-specific net market positions are consistent with the ones of the observed short term aggregate net market positions calculated using the U.S. Treasury International Capital System dataset. Moreover, we show that the ex-post premia tend to adjust towards the ex-ante values, suggesting that experts' beliefs provide a relevant information to the market. These results bring new responses to the difficulties reported by the widespread ex-post risk premium literature and enhances the usefulness of survey data in modelling the risk premium. |
| Keywords: | risk premium; foreign exchange market; international asset pricing model; survey data |
| JEL: | D84 F31 G14 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-29&r=upt |
| By: | Schottmuller, C.; Boone, J. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: Many optimal contracting papers use quasi-linear preferences. To exclude stochastic mechanisms they impose a (sufficient) condition on how the curvature of an agent's objective function varies with type. We show with quasi-linear preferences that an optimal deterministic outcome without bunching implies that stochastic mechanisms are not optimal (without any additional assumptions). |
| Keywords: | stochastic mechanisms;contract theory;quasi-linear preferences. |
| JEL: | D82 H21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012047&r=upt |