
on Utility Models and Prospect Theory 
By:  Noemi Pace (Department of Economics, University Of Venice Cà Foscari); Giuseppe Attanasi (University of Strasbourg); Christian Gollier (Toulouse School of Economics); Aldo Montesano (Bocconi University, Milan) 
Abstract:  We define coherentambiguity aversion within the Klibanoff, Marinacci and Mukerji (2005) smooth ambiguity model (henceforth KMM) as the combination of choiceambiguity aversion and valueambiguity aversion. We analyze theoretically five ambiguous decision tasks, where a subject faces twostage lotteries with binomial, uniform or unknown secondorder probabilities. We check our theoretical predictions through a 10task laboratory experiment. In (unambiguous) tasks 15, we elicit risk aversion both through a portfolio choice method and through a BDM mechanism. In (ambiguous) tasks 610, we elicit choiceambiguity aversion through the portfolio choice method and valueambiguity aversion through the BDM mechanism. We find that more than 75% of classified subjects behave according to the KMM model in all tasks 610, independent of their degree of risk aversion. Further, the percentage of coherentlyambiguityaverse subjects is lower in the binomial than in the uniform and in the unknown treatment, with only the latter difference being significant. Finally, highlyriskaverse subjects are more prone to coherentambiguity. 
Keywords:  coherentambiguity aversion, valueambiguity aversion, choiceambiguity aversion, smooth ambiguity model, binomial distribution, uniform distribution, unknown urn. 
JEL:  D81 D83 C91 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:ven:wpaper:2012_23&r=upt 
By:  Conniffe, Denis (National University of Ireland, Maynooth); O'Neill, Donal (National University of Ireland, Maynooth) 
Abstract:  There is a large literature estimating ArrowPratt coefficients of absolute and relative risk aversion. A striking feature of this literature is the very wide variation in the reported estimates of the coefficients. While there are often legitimate reasons for these differences in the estimates, there is another source of variation that has not been considered to date. The ArrowPratt coefficients are properties of the utility functions, but a number of estimates are obtained by equating these to risk aversion measures defined in a meanvariance framework. This paper shows that while the legitimacy of the meanvariance approach may hold under general conditions the additional assumptions invoked when estimating the risk aversion parameter hold only in very restricted circumstances and that serious under or over estimation can easily arise as a result. 
Keywords:  meanvariance estimation, variability in risk aversion estimation, location scale 
JEL:  C91 D81 G11 
Date:  2012–09 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp6877&r=upt 
By:  Eric T. Swanson 
Abstract:  A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to absorb shocks along either or both margins greatly alters the household’s attitudes toward risk, as shown by Swanson (2012). The present paper extends that work to the case of generalized recursive preferences, as in Epstein and Zin (1989) and Weil (1989), which are increasingly being used to bring macroeconomic models into closer agreement with basic asset pricing facts. Measures of risk aversion commonly used in the literature show no stable relationship to the equity premium in a standard RBC model, while the closedform expressions derived in this paper match the equity premium closely. Thus, measuring risk aversion correctly is crucial for understanding asset prices in the model. 
Keywords:  Households  Economic aspects ; Risk assessment 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:fip:fedfwp:201217&r=upt 
By:  Herweg, Fabian 
Abstract:  We modify the classic singleperiod inventory management problem by assuming that the newsvendor is expectationbased loss averse according to Koszegi and Rabin (2006, 2007). Expectationbased loss aversion leads to an endogenous psychological cost of leftovers as well as stockouts. If there are no monetary stockout costs, then the lossaverse newsvendor orders a quantity lower than the quantity ordered by a profitmaximizing newsvendor. If there are positive monetary costs associated with stockouts, then the lossaverse newsvendor places suboptimal orders, which can be either too high or too low. 
Keywords:  behavioral operations management; inventory decision; loss aversion; newsvendor 
Date:  2012–10 
URL:  http://d.repec.org/n?u=RePEc:lmu:muenec:14065&r=upt 
By:  Kovaleva, P.; Iori, G. 
Abstract:  We study the optimal execution strategy of selling a security. In a continuous time diffusion framework, a riskaverse trader faces the choice of selling the security promptly or placing a limit order and hence delaying the transaction in order to sell at a more favorable price. We introduce a random delay parameter, which defers limit order execution and characterizes market liquidity. The distribution of expected timetofill of limit orders conforms to the empirically observed exponential distribution of trading times, and its variance decreases with liquidity. We obtain a closedform solution and demonstrate that the presence of the lag factor linearizes the impact of other market parameters on the optimal limit price. Finally, two more stylized facts are rationalized in our model: the equilibrium bidask spread decreases with liquidity, but increases with agents risk aversion. 
Keywords:  order submission; execution delay; first passage time; risk aversion; liquidity traders 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:cty:dpaper:12/05&r=upt 