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on Utility Models and Prospect Theory |
| By: | He, Yuqing |
| Abstract: | The study tests the cardinal utility maximization hypothesis by an experimental procedure in a framework of utility scaling approach following the psychophysical-econometric paradigm, conceived in He (Psychophysical Interpretation for Utility Measures, 2011). It reveals (i) the utility maximization can be tested and has been supported by experimental results; (ii) the utility scaling approach following the psychophysical econometric paradigm offers a new foundation to discuss the utility concept; and (iii) it is necessary to distinguish the perception utility and emotion utility to respectively describe economic choices and enjoyment choices. -- |
| Keywords: | utility maximization,experiment,Klein-Rubin utility function,perception utility,emotion utility |
| JEL: | A10 D01 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201232&r=upt |
| By: | Gabriela Flores (Institute of Health Economics and Management, University of Lausanne, and Institute of Health Policy and Management, Erasmus University Rotterdam); Owen O'Donnell (Erasmus School of Economics, Erasmus University Rotterdam, and University of Macedonia, Greece) |
| Abstract: | Medical expenditure risk can pose a major threat to living standards. We derive decomposable measures of catastrophic medical expenditure risk from reference-dependent utility with loss aversion. We propose a quantile regression based method of estimating risk exposure from cross-section data containing information on the means of financing health payments. We estimate medical expenditure risk in seven Asian countries and find it is highest in Laos and China, and is lowest in Malaysia. Exposure to risk is generally higher for households that have less recourse to self-insurance, lower incomes, wealth and education, and suffer from chronic illness. |
| Keywords: | medical expenditures; catastrophic payments; downside risk; reference-dependent utility; Asia |
| JEL: | D12 D31 D80 I15 |
| Date: | 2012–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120078&r=upt |
| By: | Pietro Siorpaes |
| Abstract: | In this paper we ask whether arbitrage-free prices are obtained by utility maximization. This is found to be true for any given investor, provided that one considers the marginal utility-based prices relative to all initial endowments with finite utility. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1207.4749&r=upt |
| By: | Jim Dolmas |
| Abstract: | The habit model of Campbell and Cochrane (1999) specifies a process for the 'surplus ratio'-the excess of consumption over habit, relative to consumption-rather than an evolution for the habit stock. It's not immediately apparent if their formulation can be accommodated within the Markov chain framework of Mehra and Prescott (1985). This note illustrates one way to create a Campbell and Cochrane-like model within the Mehra-Prescott framework. A consequence is that we can perform another sort of reverse-engineering exercize-we can calibrate the resulting model to match the stochastic discount factor derived in the Mehra-Prescott framework by Melino and Yang (2003). The Melino-Yang SDF, combined with Mehra and Prescott's consumption process, yields asset returns that exactly match the first and second moments of the data, as estimated by Mehra and Prescott.> ; A byproduct of the exercize is an equivalent (in terms of SDFs) representation of Campbell-Cochrane preferences as a state-dependent version of standard time-additively-separable, constant relative risk aversion preferences. When calibrated to exactly match the asset return data, both the utility discount factor and the coefficient of relative risk aversion vary with the Markov state. Not surprisingly, our Campbell-Cochrane preferences are equivalent to a state-dependent representation with strongly countercyclical risk aversion. Less expected is the equivalent utility discount factor-it is uniformly greater than one, and countercyclical. In their analysis, Melino and Yang ruled out state-dependent specifications where the utility discount factor exceeds one. Our model gives one plausible rationalization for such a specification. |
| Keywords: | Financial markets ; Asset pricing |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1205&r=upt |
| By: | Sigal Kaplan; Yoram Shiftan; Shlomo Bekhor |
| Abstract: | Spatial choices entailing many alternatives (e.g., residence, trip destination) are typically represented by compensatory models based on utility maximization with exogenous choice set generation, which might lead to incorrect choice sets and hence to biased demand elasticity estimates. Semi-compensatory models show promise in increasing the accuracy of choice set specification by integrating choice set formation within discrete choice models. These models represent a two-stage process consisting of an elimination-based choice set formation upon satisfying criteria thresholds followed by utility-based choice. However, they are subject to simplifying assumptions that impede their application in urban planning. This paper proposes a novel semi-compensatory model that alleviates the simplifying assumptions concerning (i) the number of alternatives, (ii) the representation of choice set formation, and (iii) the error structure. The proposed semi-compensatory model represents a sequence of choice set formation based on the conjunctive heuristic with correlated thresholds, and utility-based choice accommodating alternatively nested substitution patterns across the alternatives and random taste variation across the population. The proposed model is applied to off-campus rental apartment choice of students. The population sample for model estimation consists of 1,893 residential choices from 631 students, who participated in a stated-preference web-based survey of rental apartment choice. The survey comprised a two-stage choice experiment supplemented by a questionnaire, which elicited socio-economic characteristics, attitudes and preferences. During the experiment, respondents searched an apartment dataset by a list of thresholds for pre-defined criteria and then ranked their three most preferred apartments from the resulting choice set. The survey website seamlessly recorded the chosen apartments and their respective thresholds. Results show (i) the estimated model for a realistic universal realm of 200 alternatives, (ii) the representation of correlated threshold as a function of individual characteristics, and (iii) the feasibility and importance of introducing a flexible error structure into semi-compensatory models. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa10p65&r=upt |
| By: | Blaufus, Kay; Möhlmann, Axel |
| Abstract: | This paper studies behavioral responses to taxes in financial markets. It is motivated by recent puzzling empirical evidence of taxable municipal bond yields significantly exceeding the level expected relative to tax exempt bonds. A behavioral explanation is a tax aversion bias, the phenomenon that people perceive an additional burden associated with tax payments. We conduct market experiments on the trading of differently taxed and labeled securities. The data show an initial overvaluation of tax payments that diminishes when subjects gain experience. The tax deduction of expenses is valued more than an equivalent tax exemption of earnings. We find that the persistence of the tax aversion bias critically depends on the quality of feedback. This suggests that tax aversion predominantly occurs in one-time, unfamiliar financial decisions and to a lesser extent in repetitive choices. -- |
| Keywords: | Behavioral finance,Behavioral taxation,Investor psychology,Tax aversion,Experiment |
| JEL: | D03 G32 H20 H3 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:arqudp:133&r=upt |
| By: | R.A. Somerville (Department of Economics, Trinity College Dublin) |
| Abstract: | What if consumers' actions reveal concern for contributing to an externality, even without a pecuniary incentive? Within a two-level model, a policymaker prices disposal of waste, and a representative consumer chooses a consumption level for a dirty good and a division of the consequent waste between recycling and disposal; only disposal creates an externality. In the special case of rational expectations, each consumer accepts full responsibility for his contribution to the externality. A first-best optimum is then achieved by a form of Pigouvian pricing, assuming unconstrained income taxes/transfers. Otherwise, Pigouvian pricing is second-best, unless individuals disclaim all responsibility for the externality and utility has a separable form. The model explains why recycling may occur even with free waste-disposal. |
| Keywords: | externality, Pigouvian tax, separable utility, rational expectation, recycling |
| JEL: | D11 D21 H23 Q5 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0112&r=upt |