nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2012‒09‒09
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Beyond the Risk Neutral Utility Function By William Barnett; Yi Liu
  2. When is the Risk of Cooperation Worth Taking? The Prisoner’s Dilemma as a Game of Multiple Motives By Christoph Engel; Lilia Zhurakhovska
  3. On attitude towards choice - Some experimental evidence of choice aversion By Fabrice Le Lec; Benoît Tarroux
  4. The CAPM-Extended Divisia Monetary Aggregate with Exact Tracking under Risk By William Barnett; Yi Liu
  5. Hidden Skewness By Ludwig Ensthaler; Olga Nottmeyer; Georg Weizsäcker
  6. The Exact Theoretical Rational Expectations Monetary Aggregate By William Barnett; Melvin J. Hinich; Piyu Yue

  1. By: William Barnett (Department of Economics, The University of Kansas); Yi Liu (Washington University in St.Louis)
    Date: 2012–09
  2. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Lilia Zhurakhovska (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Both in the field and in the lab, participants frequently cooperate, despite the fact that the situation can be modelled as a simultaneous, symmetric prisoner’s dilemma. This experiment manipulates the payoff in case both players defect, and explains the degree of cooperation by a combination of five motives: the size of gains from cooperation, expectations about cooperativeness in the population in question, the degree of risk and loss aversion, and the degree by which a participant is tempted to inflict harm on another participant if this gives her a chance for an even higher payoff. Information about these motivational forces stems from additional within subjects tests. All five factors are significant only if one controls for all the other motives, which suggests that a prisoner’s dilemma is a game jointly characterised by these five motives. The need to control for the remaining explanations seems to be the reason why earlier attempts at explaining choices in the prisoner’s dilemma with personality have not been
    Keywords: efficiency, Risk aversion, Conditional Cooperation, prisoner’s dilemma, Belief, Loss Aversion, Risky Dictator Game
    JEL: H41 C72 C91 D03
    Date: 2012–08
  3. By: Fabrice Le Lec (Catholic University of Lille and LEM, UMR CNRS 8179); Benoît Tarroux (University of Rennes 1 - CREM, UMR CNRS 6211 - IDEP)
    Abstract: This paper investigates how people value choice. The experiment consists of eliciting subjects' willingness to accept for various choice sets. This approach allows us to assess whether prior to making their decision, people appreciate a wider set of options or not. In contrast with the existing literature, our experimental protocol controsl for several parameters usually left aside and provides an environment where usual explanations are unlikely to hold, e.g., complexity of task. Our results suggest that on average individuals are choice averse: the value of a choice set is significantly and robustly lower than the one of its preferred element.
    Keywords: Choice Aversion, Choice Attitude, Hyperchoice, Freedom of Choice, Choice Overload
    JEL: C91 D03 D63
    Date: 2012–08
  4. By: William Barnett (Department of Economics, The University of Kansas); Yi Liu (Washington University in St.Louis)
    Date: 2012–09
  5. By: Ludwig Ensthaler; Olga Nottmeyer; Georg Weizsäcker
    Abstract: Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. A simple laboratory experiment shows that participants either strongly underestimate skewness or ignore it completely. The participants' choices reveal bounds on their subjective medians of a financial asset's price that is subject to stochastic growth. The observed bias in expectations is irrespective to risk preferences and fairly robust to feedback. It is consistent with a behavioral model in which geometric growth is confused with linear growth. The bias is a possible explanation of investors' misunderstandings of real-world financial products like leveraged ETFs.
    Keywords: Skewness, belief biases, binomial tree
    JEL: C91 D03
    Date: 2012
  6. By: William Barnett (Department of Economics, The University of Kansas); Melvin J. Hinich (University of Texas at Austin); Piyu Yue (IC2 Institute at the University of Texas at Austin)
    Abstract: In aggregation theory, index numbers are judged relative to their ability to track the exact aggregator functions nested within the economy’s structure. Within the monetary sector, Barnett, Liu, and Jensen (1997) compared two statistical index numbers: the Divisia monetary aggregate and the simple sum monetary aggregate. They produced those comparisons using simulated data. In this paper, we again compare those two statistical index numbers with the exact rational expectations monetary aggregate, but we use actual data. Since we are not using simulated data, we estimate the parameters of the Euler equations and thereby of the nested monetary aggregator function using generalized method of moments. We explore the tracking errors of the two index numbers relative to the estimated exact aggregate. We investigate the circumstances under which risk aversion increases tracking error. We also use polyspectral methods to test for the existence of remaining nonlinear structure in the residual tracking errors.
    Keywords: Monetary aggregation, index number theory, spectral analysis, nonlinearity
    Date: 2012–09

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