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on Utility Models and Prospect Theory |
| By: | Liebenehm, Sabine; Waibel, Hermann |
| Abstract: | This study investigates risk and time preferences of small-holder cattle farmers in West Africa. We apply a discounted utility model and jointly estimate a prospect theory-based utility function and a quasi-hyperbolic discounting function using a maximum likelihood method. Results show that West African farmers are less loss-averse and are more patient than suggested by comparable studies in Asian developing countries. The main factors influencing farmers' risk and time preferences are cattle herd size and net revenue from sales of cattle products. |
| Keywords: | experiments, prospect theory, risk preference, time preference, West Africa |
| JEL: | D81 C61 C93 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-501&r=upt |
| By: | Nguyen, Quang (Nanyang Technological University, Singapore); Villeval, Marie Claire (CNRS, GATE); Xu, Hui (CNRS, GATE) |
| Abstract: | We study the influence of risk and time preferences on trust and trustworthiness by conducting a field experiment in Vietnamese villages and by estimating the parameters of the Cumulative Prospect Theory and of quasi-hyperbolic time preferences. We find that while probability sensitivity or risk aversion do not affect trust, loss aversion influences trust indirectly by lowering the expectations of return. Also, more risk averse and less present biased participants are found to be trustworthier. The experience of receiving remittances influences behavior and a longer exposure to a collectivist economy tend to reduce trust and trustworthiness. |
| Keywords: | trust, trustworthiness, risk preferences, time preferences, Cumulative Prospect Theory, Vietnam, field experiment |
| JEL: | C91 C93 D81 D90 O10 O53 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6851&r=upt |
| By: | Antoni Bosch-Domenech; Joaquim Silvestre (Department of Economics, University of California Davis) |
| 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 and scrambles the ranking of individuals by risk aversion. This bias, that we call embedding 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 also find that the more recent elicitation method due to Abdellaoui et al. (2011), also based on lists but using only one and the same probability in the list, 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 aversion, risk attitudes, experiments, lists, elicitation method, Holt, Laury, Abdellaoui, Driouchi, l’Haridon, independence axiom, probability weighting |
| JEL: | C |
| Date: | 2012–09–26 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:12-23&r=upt |
| By: | Sacha Bourgeois-Gironde (IJN - Institut Jean-Nicod - CNRS : UMR8129 - Ecole Normale Supérieure de Paris - ENS Paris - Ecole des Hautes Etudes en Sciences Sociales (EHESS), LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442); Anne Corcos (LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442); François Pannequin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan) |
| Abstract: | According to an early approach, the decision to trust in the one-shot anonymous trust game is intuitively tantamount to a risky decision: the willingness to bet on the reciprocation of my investment. In a seminal study, Eckel and Wilson (2004) explored the correlation between risk attitudes (as elicited through a Holt and Laury mechanism) and the behavior of investors in the trust game. They found no correlation: trust decision cannot be viewed as a risky decision. However, since the probabilities of possible returns are unknown, we argue that trust behavior may correlate more specifically with ambiguity aversion rather than with risk aversion. We therefore modified Eckel and Wilson's experimental procedure in order to investigate the question as to whether trust is an ambiguous decision. We extended Holt and Laury switching-point elicitation mechanism between risky lotteries to ambiguous lotteries as Chrakravarty and Roy (2009) did. We then ran an experimental session including a standard one shot anonymous trust game (OSG). We found significant negative correlations between aversion to ambiguity and behavior in OSG. This result is a plea in favor of a decision-theoretical analogy between choices in ambiguous lotteries and trust-games. |
| Keywords: | trust, risk aversion, ambiguity |
| Date: | 2012–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:ijn_00734563&r=upt |
| By: | Sacha Bourgeois-Gironde (IJN - Institut Jean-Nicod - CNRS : UMR8129 - Ecole Normale Supérieure de Paris - ENS Paris - Ecole des Hautes Etudes en Sciences Sociales (EHESS), LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442); Anne Corcos François Pannequin (LEM - Laboratoire d'Économie Moderne - Université Paris II - Panthéon-Assas : EA4442) |
| Abstract: | In this article, we focus on two types of "aversion" which we deem essential aspects of the notion of trust: betrayal aversion (social) and ambiguity aversion (a special case of aversion to uncertainty). Based on trust-games studies in experimental economics and neuroeconomics, our main goal is to assess the conceptual, behavioral and neurobiological connections between betrayal and ambiguity aversions. From a social and individual psychological point of view the bottom line of our trusting behavior could be our general aversion to ambiguous signals. We approach social trust in the terms of a phenomenon based on uncertainty aversion.Specifically, a reduction of the perceived uncertainty of a social interaction tends to build up a trusting climate conducive to trade by decreasing betrayal aversion.We hypothesize that betrayal aversion and ambiguity aversion bear such a negative correlation. Focusing on this potential negative correlation our approach clearly differs from more positive accounts of trust centred on altruism. |
| Keywords: | trust game - betrayal aversion - ambiguity aversion - neuroeconomics |
| Date: | 2012–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:ijn_00734564&r=upt |
| By: | Karl Schlag; James Tremevan |
| Abstract: | We present methods of belief elicitation which are applicable for any non-trivial utility function. Unlike existing techniques that account for deviations from risk-neutrality, these methods are highly transparent to sub- jects. Rather than identifying beliefs exactly we identify bounds on beliefs, thus trading o precision for generality and simplicity. |
| JEL: | C90 D83 C81 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1204&r=upt |
| By: | Fortin, Ines (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Hlouskova, Jaroslava (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and School of Business and Economics, Thompson Rivers University, Kamloops, British Columbia, Canada) |
| Abstract: | We study the asset allocation of a quadratic loss-averse (QLA) investor and derive conditions under which the QLA problem is equivalent to the mean-variance (MV) and conditional value-at-risk (CVaR) problems. Then we solve analytically the two-asset problem of the QLA investor for a risk-free and a risky asset. We find that the optimal QLA investment in the risky asset is finite, strictly positive and is minimal with respect to the reference point for a value strictly larger than the risk-free rate. Finally, we implement the trading strategy of a QLA investor who reallocates her portfolio on a monthly basis using 13 EU and US assets. We find that QLA portfolios (mostly) outperform MV and CVaR portfolios and that incorporating a conservative dynamic update of the QLA parameters improves the performance of QLA portfolios. Compared with linear loss-averse portfolios, QLA portfolios display significantly less risk but they also yield lower returns. |
| Keywords: | Quadratic loss aversion, prospect theory, portfolio optimization, MV and CVaR portfolios, investment strategy |
| JEL: | D03 D81 G11 G15 G24 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:291&r=upt |
| By: | Yang Yan; Dajing Shang; Oliver Linton (Institute for Fiscal Studies and Cambridge University) |
| Abstract: | This paper proposes efficient estimators of risk measures in a semiparametric GARCH model defined through moment constraints. Moment constraints are often used to identify and estimate the mean and variance parameters and are however discarded when estimating error quantiles. In order to prevent this efficiency loss in quantile estimation we propose a quantile estimator based on inverting an empirical likelihood weighted distribution estimator. It is found that the new quantile estimator is uniformly more efficient than the simple empirical quantile and a quantile estimator based on normalized residuals. At the same time, the efficiency gain in error quantile estimation hingeson the efficiency of estimators of the variance parameters. We show that the same conclusion applies to the estimation of conditional Expected Shortfall. Our comparison also leads to interesting implications of residual bootstrap for dynamic models. We find that these proposed estimators for conditional Value-at-Risk and expected shortfall are asymptotically mixed normal. This asymptotic theory can be used to construct confidence bands for these estimators by taking account of parameter uncertainty. Simulation evidence as well as empirical results are provided. |
| Keywords: | Empirical Likelihood; Empirical process; GARCH; Quantile; Value-at-Risk; Expected Shortfall. |
| JEL: | C14 C22 G22 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:25/12&r=upt |