
on Utility Models and Prospect Theory 
By:  Steffen Andersen; James C. Cox; Glenn W. Harrison; Morten Lau; E. Elisabet RutstrÃ¶m; Vjollca Sadiraj 
Abstract:  Measures of risk attitudes derived from experiments are often questioned because they are based on small stakes bets and do not account for the extent to which the decisionmaker integrates the prizes of the experimental tasks with personal wealth. We exploit the existence of detailed information on individual wealth of experimental subjects in Denmark, and directly estimate risk attitudes and the degree of asset integration consistent with observed behavior. The behavior of the adult Danes in our experiment is consistent with partial asset integration: they behave as if some fraction of personal wealth is combined with experimental prizes in a utility function, and that this combination entails less than perfect substitution. Our subjects do not perfectly asset integrate. The implied risk attitudes from estimating these specifications imply risk premia and certainty equivalents that are a priori plausible under expected utility theory or rank dependent utility models. These are reassuring and constructive solutions to payoff calibration paradoxes. In addition, the rigorous, structural modeling of partial asset integration points to a rich array of neglected questions in risk management and policy evaluation in important field settings. 
Date:  2012–07 
URL:  http://d.repec.org/n?u=RePEc:exc:wpaper:201212&r=upt 
By:  Crosetto, Paolo (Max Planck Institute for Economics); Filippin, Antonio (University of Milan) 
Abstract:  This paper presents the Bomb Risk Elicitation Task (BRET), an intuitive procedure aimed at measuring risk attitudes. Subjects decide how many boxes to collect out of 100, one of which containing a bomb. Earnings increase linearly with the number of boxes accumulated but are zero if the bomb is also collected. The BRET requires minimal numeracy skills, avoids truncation of the data, allows to precisely estimate both risk aversion and risk seeking, and is not affected by the degree of loss aversion or by violations of the Reduction Axiom. We validate the task and test its robustness in a largescale experiment. Choices react significantly to the stakes and to the size of the choice set. Our experiment rationalizes the gender gap that often characterizes choices under uncertainty by means of a higher loss rather than risk aversion. 
Keywords:  risk aversion, loss aversion, elicitation method 
JEL:  C81 C91 D81 
Date:  2012–07 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp6710&r=upt 
By:  Jan Heufer 
Abstract:  This paper provides an efficient way to generate a set of random choices on a set of budgets which satisfy the Generalised Axiom of Revealed Preferences (GARP), that is, they are consistent with utility maximisation. The choices are drawn from an approximate uniform distribution on the admissible region on each budget which ensures consistency with GARP, based on a Markovian Monte Carlo algorithm due to Smith (1984). This procedure can be used to extend Bronars‘ (1987) method as it can be used to approximate the power of tests for conditions for which GARP is a necessary but not sufficient condition (e.g., homotheticity, separability, risk aversion, etc.). For example, it allows to approximate the probability that a set of random choices which happens to satisfy GARP is also consistent with homotheticity. The approach can also be applied to production analysis and nonparametric tests of cost minimisation. 
Keywords:  Cost minimisation; GARP; hypothesis testing; Monte Carlo methods; nonparametric tests; test power; random optimal choices; revealed preference; utility maximisation 
JEL:  C14 C63 D11 D12 
Date:  2012–07 
URL:  http://d.repec.org/n?u=RePEc:rwi:repape:0354&r=upt 
By:  Ross, Nicholas; Santos, Paulo; Capon, Timothy 
Abstract:  The slow adoption of innovations in less developed countries has long been a puzzle, given the high expected returns. This paper investigates the role of ambiguityaversion as a fundamental behavioral determinant of technology adoption, motivated by the fact that, almost by denition, farmers have less certain information about the outcomes of new technologies compared with traditional technologies. Using primary data from field experiments used to measure behavioral parameters such as risk and ambiguity aversion, we find that farmers' aversion to ambiguity (but not risk aversion) limits the adoption of new technologies, even when expected profits are quite high. Interventions that reduce uncertainty (in place of interventions that reduce risk) seem a promising way of speeding up the adoption of innovations. 
Keywords:  International Development, Research and Development/Tech Change/Emerging Technologies, Risk and Uncertainty, 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:ags:iaae12:126492&r=upt 
By:  Jonathan K. Yoder; Adrienne M. Ohler; Hayley H. Chouinard (School of Economic Sciences, Washington State University) 
Abstract:  A lottery that provides participants the opportunity to choose among a set of simple gambles over multiattribute goods results in an endogenous distribution of win rates over gambles that reflects tradeoffs between the relative desirability of the available goods and the probability of winning. These win rates provide sufficient information to estimate hedonic prices, marginal utility, and marginal rates of substitution among attributes. We develop a model for mapping preferences from this information set and apply it to Idaho’s Four Rivers Whitewater Recreation Lottery. This lottery structure shows promise as a foundation for economic experiments for preference revelation. 
Keywords:  lotteries, complex goods, hedonic pricing, choice under uncertainty 
JEL:  D01 D49 D84 H42 Q26 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:wsu:wpaper:yoder11&r=upt 
By:  Gerasimou, Georgios 
Abstract:  This paper proposes a model of individual choice that does not assume completeness of the decision maker's preferences. The model helps explain in a natural way, and within a unied framework of choice in the presence of preferenceincomparable options, three distinct behavioural phenomena: the asymmetric dominance/attraction effect, choice deferral and status quo bias. A decision maker who follows the decision rule featured in the model chooses an alternative from a menu if it is totally preferenceundominated in that menu and at the same time is also partially preferencedominant. In situations where the decision maker's preferences are complete the model delivers strict utility maximisation. 
Keywords:  Attraction Effect; Choice Deferral; Status Quo Bias; Incomplete Preferences; Bounded Rationality 
JEL:  D03 D11 D01 
Date:  2012–07–07 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:40097&r=upt 
By:  Hausken, Kjell (UiS); Ncube, Mthuli (African Development Bank Group) 
Abstract:  . 
Keywords:  Risk; Production; Fightning; Conflict; Cardinal Utility 
JEL:  C72 D72 D74 D80 
Date:  2012–06–30 
URL:  http://d.repec.org/n?u=RePEc:hhs:stavef:2012_014&r=upt 
By:  Velu, Chander (University of Cambridge); Iyer, Sriya (University of Cambridge); Gair, Jonathan R. (University of Cambridge) 
Abstract:  Players cooperate in experiments more than game theory would predict. In order to explain this, we introduce the 'returnsbased beliefs' approach: the expected returns of a particular strategy in proportion to the total expected returns of all strategies. Using a decision analytic solution concept, Luce's (1959) probabilistic choice model, and 'hyperpriors' for ambiguity in players' cooperability, our approach explains empirical observations in classic games such as the Prisoner's Dilemma. Testing the closeness of fit of our model on Selten and Chmura (2008) data for completely mixed 2x2 games shows that with loss aversion, returnsbased beliefs explain the data better than other equilibrium concepts. 
Keywords:  subjective probabilities, decision making, cooperation 
JEL:  D01 D03 
Date:  2012–07 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp6711&r=upt 
By:  Eriksen, Kristoffer (UiS); Kvaløy, Ola (UiS) 
Abstract:  There is a common notion that incentive schemes in the financial industry trigger myopia and risktaking. In some sense this contrasts with the concept of myopic loss aversion (MLA), which implies that myopia mitigates risktaking. A number of experimental studies support the MLAhypothesis by showing that people take less risk the more frequently their investments are evaluated. In this paper we show experimentally that if subjects are exposed to tournament incentives, they take more risk the more frequently investments are evaluated. 
Keywords:  tournaments 
JEL:  A10 
Date:  2012–07–17 
URL:  http://d.repec.org/n?u=RePEc:hhs:stavef:2012_013&r=upt 
By:  Eike Kroll (Faculty of Economics and Management, OttovonGuericke University Magdeburg); Ralf Morgenstern (Faculty of Economics and Management, OttovonGuericke University Magdeburg); Thomas Neumann (Faculty of Economics and Management, OttovonGuericke University Magdeburg); Stephan Schosser (Faculty of Economics and Management, OttovonGuericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, OttovonGuericke University Magdeburg) 
Abstract:  While experimental research on social dilemmas focuses on the distribution of gains, this paper analyzes social preferences in the case of losses. In this experimental study, participants share a loss in a Nash bargaining game. Instead of monetary losses, we use waiting time as an incentive. We assume that participants prefer less to more waiting time. Our experiment consists of four versions of the Nash bargaining game, which vary in a way that allows a comparison of four classical concepts on negotiations (Nash, Equal Loss, Equal Gain, and KalaiSmorodinski), and Inequality Aversion. We find an equal split of waiting time for all parameter variations. Therefore, our experimental evidence shows that Inequality Aversion provides a better prediction than do classical concepts for the outcome of a Nash bargaining game involving losses. Furthermore, participants resort to Inequality Aversion at the cost of overall welfare. 
Keywords:  bargaining, losses, inequality aversion, experimental economics 
JEL:  C7 C9 
Date:  2012–06 
URL:  http://d.repec.org/n?u=RePEc:mag:wpaper:120014&r=upt 
By:  Olaf Posch (Aarhus University and CREATES); Andreas Schrimpf (Bank for International Settlements and CREATES) 
Abstract:  This paper shows that the consumptionbased asset pricing model (CCAPM) with lowprobability disaster risk rationalizes large pricing errors, i.e. Euler equation errors. This result is remarkable, since Lettau and Ludvigson (2009) show that leading asset pricing models cannot explain sizeable pricing errors in the CCAPM. We also show (analytically and in a Monte Carlo study) that implausible estimates of risk aversion and time preference are not puzzling in this framework and emerge as a result of rational pricing errors. While this bias essentially removes the pricing error in the traditional endowment economy, a production economy with stochastically changing investment opportunities generates large and persistent empirical pricing errors. 
Keywords:  Euler equation errors, Rare disasters, CCAPM 
JEL:  E21 G12 O41 
Date:  2012–07–11 
URL:  http://d.repec.org/n?u=RePEc:aah:create:201232&r=upt 
By:  Scott Baker and Claudio Mezzetti 
Abstract:  We examine a dynamic model of upordown problem solving. A decision maker can either spend resources investigating a new problem before deciding what to do, or decide based on similarity with precedent problems. Over time, a decision making framework, or jurisprudence, develops. We focus on the model?s application to judgemade law. We show that judges summarily apply precedent in some cases. The law may converge to efficient or inefficient rules. With positive probability, identical cases are treated di¤erently. As the court learns over time, inconsistencies become less likely. We discuss the existing empirical evidence and the model?s testable implications. 
Keywords:  Law and Economics, Incompleteness of Law, JudgeMade Law, Evolution 
JEL:  K10 K40 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:mlb:wpaper:1144&r=upt 
By:  Alfredo Di Tillio; Nenad Kos; Matthias Messner 
Abstract:  This paper considers the optimal mechanism design problem of an expected revenue maximizing principal who wants to sell a single unit of a good to an agent who is ambiguity averse in the sense of Gilboa and Schmeidler (1989). We show that the optimal static mechanism is an ambiguous mechanism. An ambiguous mechanism specifies a message space and a set of outcome functions. After showing that (a version of) the Revelation Principle holds in our environment, we give an exact characterization of the (smallest) optimal ambiguous mechanism. If the type set is composed of N (finite) types, then the (smallest) optimal ambiguous mechanism contains N  1 outcome functions. We show that the share of the surplus that the designer can extract from the agent increases as the type set becomes larger and the probability of each single type decreases. In the limiting case where the agent’s type is drawn from a nonatomic distribution on an interval, the optimal ambiguous mechanism extracts all the rent from the agent. 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:igi:igierp:446&r=upt 
By:  Ivo Bischoff (University of Kassel); Carolin Neuhaus (University of Bonn); Peter Trautner (University of Bonn); Bernd Weber (University of Bonn) 
Abstract:  Which motives drive the decision of a voter to approve or reject a policy proposal? The Public Choice literature distinguishes between instrumental and expressive voting motives. We investigate the importance of these motives by analysing the patterns of neural activity in different voting situations. We conduct an fMRIexperiment which investigates neural activation at the moment of voting and use the altruism scale proposed by Tankersley et al. (2007) to differentiate between altruists and nonaltruists. Nonaltruists show neural activation patterns that are consistent with expressive voting motives. Among nonaltruists, we also find activation patterns that point at egoistic instrumental motives. Both results are in line with the corresponding Public Choice literature. On the other hand, we find no evidence for expressive voting motives among altruists. Their neural activation pattern is generally much less conclusive with respect to the underlying motives. 
Keywords:  Voting behavior, expressive voting, instrumental voting, political decision making, charitable donation, neuroscience, neuroeconomics, neuropolitical, fMRI 
JEL:  D72 D87 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:mar:magkse:201234&r=upt 