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on Utility Models and Prospect Theory |
| By: | Seidl, Christian |
| Abstract: | In 1713 Nicolas Bernoulli sent to de Montmort several mathematical problems, the fifth of which was at odds with the then prevailing belief that the advantage of games of hazard follows from their expected value. In spite of the infinite expected value of this game, no gambler would venture a major stake in this game. In this year, de Montmort published this problem in his Essay d'analyse sur les jeux de hazard. By dint of this book the problem became known to the mathematics profession and elicited solution proposals by Gabriel Cramer, Daniel Bernoulli (after whom it became known as the Petersburg Paradox), and Georges de Buffon. Karl Menger was the first to discover that bounded utility is a necessary and sufficient condition to warrant a finite expected value of the Petersburg Paradox. It was, in particular, Menger's article which provided an important cue for the development of expected utility by von Neumann and Morgenstern. The present paper gives a concise account of the origin of the Petersburg Paradox and its solution proposals. In its third section, it provides a rigorous analysis of the Petersburg Paradox from the uniform methodological vantage point of d'Alembert's ratio text. Moreover, it is shown that appropriate mappings of the winnings or of the probabilities can solve or regain a Petersburg Paradox, where the use of probabilities seems to have been overlooked by the profession. -- |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201210&r=upt |
| By: | Attanasi, Giuseppe; Gollier, Christian; Montesano, Aldo; Pace, Noémie |
| Abstract: | We define coherent-ambiguity aversion within the Klibano¤, Marinacci and Mukerji (2005) smooth ambiguity model (henceforth KMM) as the combination of choice-ambiguity aversion and value-ambiguity aversion. We analyze theoretically ?ve ambiguous decision tasks, where a subject faces two-stage lotteries with binomial, uniform or unknown second-order probabilities. We check our theoretical predictions through a 10-task laboratory experiment. In (unambiguous) tasks 1-5, we elicit risk aversion both through a portfolio choice method and through a BDM mechanism. In (ambiguous) tasks 6-10, we elicit choice-ambiguity aversion through the portfolio choice method and value-ambiguity aversion through the BDM mechanism. We ?nd that more than 75% of classi?ed subjects behave according to the KMM model in all tasks 6-10, independent of their degree of risk aversion. Further, the percentage of coherently-ambiguity-averse subjects is lower in the binomial than in the uniform and in the unknown treatment, with only the latter di¤erence being signi?cant. Finally, highly-risk-averse subjects are more prone to coherent-ambiguity. |
| Keywords: | coherent-ambiguity aversion, value-ambiguity aversion, choice-ambiguity aversion, smooth ambiguity model, binomial distribution, uniform distribution, unknown urn. |
| JEL: | C91 D81 D83 |
| Date: | 2012–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26314&r=upt |
| By: | Ana I. Balsa; Néstor Gandelman; Nicolás Gonzalez |
| Abstract: | Using data on Uruguayan adolescents, we estimate peer effects in risk attitudes. Relative risk aversion is elicited in an experimental setting. Identification is based on parents not being able to choose the class within the school of their choice. After controlling for school-grade fixed effect and addressing endogeneity due to simultaneity, we find a significant and quantitative large impact of peers on individuals risk aversion. An increase in one standard deviation of the group risk aversion produces an increase in 44-64% on an individual risk aversion. These findings enhance the importance of multiplicative effects related to risk behavior. |
| Keywords: | risk aversion; peer effects; instrumental variables |
| JEL: | I12 D1 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mnt:wpaper:1205&r=upt |
| By: | Fabrizio, Germano; Peio, Zuazo Garín |
| Abstract: | We extend Aumann's [3] theorem deriving correlated equilibria as a consequence of common priors and common knowledge of rationality by explicitly allowing for non-rational behavior. We replace the assumption of common knowledge of rationality with a substantially weaker notion, joint p-belief of rationality, where agents believe the other agents are rational with probabilities p = (pi)i2I or more. We show that behavior in this case constitutes a constrained correlated equilibrium of a doubled game satisfying certain p-belief constraints and characterize the topological structure of the resulting set of p-rational outcomes. We establish continuity in the parameters p and show that, for p su ciently close to one, the p-rational outcomes are close to the correlated equilibria and, with high probability, supported on strategies that survive the iterated elimination of strictly dominated strategies. Finally, we extend Aumann and Dreze's [4] theorem on rational expectations of interim types to the broader p-rational belief systems, and also discuss the case of non-common priors. |
| Keywords: | bounded rationality, correlated equilibrium, aproximate common knowledge, p-rational blief system, common prior, information noncooperative game |
| Date: | 2012–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:ikerla:8757&r=upt |
| By: | Abi Adams; Laurens Cherchye; Bram De Rock; Eqout Verriest |
| Abstract: | This paper develops a revealed preference methodology for exploring whether time inconsistencies in household choice are the product of nonstationarities at the individual level or the result of individual heterogeneity and renegotiation within the collective unit. An empirical application to household-level microdata highlights that an explicit recognition of the collective nature of choice allows the vast majority of household behaviour to be rationalised by theory that assumes preference stationarity at the individual level. For our particular short panel data set, simply permitting limited intrahousehold heterogeneity in time preferences allows the choices of 98.4% of the sample to be rationalised by a model that assumes exponential discounting at the individual level. We also find that couples characterized by lower divergece in spousal discount rates are older, more likely to have children and wealthier, which we take as indications of experiencing higher match quality. |
| Keywords: | Time consistency, Collective choice, Full efficiency, Renegotiation, Revealed preference |
| JEL: | D11 D12 D13 C14 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:625&r=upt |
| By: | Jacopo Mazza |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1225&r=upt |
| By: | Alfred Mbairadjim Moussa; Jules Sadefo Kamdem; Michel Terraza |
| Abstract: | In this paper, following the notion of probabilistic risk adjusted performance measures; we introduce that of fuzzy risk adjusted measures (FRAM). In order to deal efficiently with the closing-based returns bias induced by market microstructure noise, as well as to handle their uncertain variability, we combine fuzzy set theory and probability theory. The returns are first represented as fuzzy random variables and then used in defining fuzzy versions of some adjusted performance measures. Using a recent ordering method for fuzzy numbers, we propose a ranking of funds based on these fuzzy performance measures. Finally, empirical studies carried out on fifty French Hedge Funds confirm the effectiveness and give the benefits of our approach over the classical performance ratios. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:12-24&r=upt |
| By: | Kapaun, Ute; Quaas, Martin F. |
| Abstract: | We analyze the effect of environmental uncertainties on optimal fishery management in a bio-economic fishery model. Unlike most of the literature on resource economics, but in line with ecological models, we allow the different biological processes of survival and recruitment to be affected differently by environmental uncertainties. We show that the overall effect of uncertainty on the optimal size of a fish stock is ambiguous, depending on the prudence of the value function. For the case of a risk-neutral fishery manager, the overall effect depends on the relative magnitude of two opposing effects, the 'convex-cost effect' and the 'gambling effect'. We apply the analysis to the Baltic cod and the North Sea herring fisheries, concluding that for risk neutral agents the net effect of environmental uncertainties on the optimal size of these fish stocks is negative, albeit small in absolute value. Under risk aversion, the effect on optimal stock size is positive for sufficiently high coefficients of constant relative risk aversion. -- |
| Keywords: | fishery economics,environmental uncertainty,constant escapement,risk aversion,prudence |
| JEL: | Q22 Q57 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201209&r=upt |
| By: | Bruno Lanz (Department of Management, Technology and Economics, ETH Zurich, Switzerland); Allan Provins (Economics for the Environment Consultancy, London, UK) |
| Abstract: | Discrete choice experiments are increasingly being used to assess preferences for services provided by regulated utilities. A commonly observed tendency of customers to opt for the status quo option may signal unwillingness to trade-off changes in service levels with bills, questioning the welfare theoretic interpretation of stated choices. In this paper, we examine status-quo choices and systematic non-trading behaviour in a discrete choice experiment encompassing a wide range of water-related service attributes. Our analysis is novel in several dimensions. First, we use a split sample design to vary the description of the status quo and the survey administration mode (online vs. in person). Second, we define service attributes to span both improvements and deterioration, so that the status quo is not necessarily the least-cost alternative. Third, we elicit information about the perception of the status quo and the impact of service attributes on day-to-day activities. Our results suggest that status quo choices largely reflect preferences. |
| Keywords: | cost-benefit analysis, regulated utilities, economic valuation, discrete choice experiments, individual decision making, status quo effects |
| JEL: | C3 C35 D H4 L4 L43 L9 L95 Q Q5 Q51 Q58 Q2 Q25 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:cee:wpcepe:12-87&r=upt |
| By: | Ritxar Arlegi (Departamento de Economía-UPNA) |
| Abstract: | In this paper we argue, inspired by some psychological literature, that choices are the outcome of the interplay of different, potentially conflicting motivations. We propose an axiomatic approach with two motivations, which we assume to be single-peaked over a certain given dimension. We first consider the case in which motivations are given and stable, and then introduce the possibility for motivations to change. We show first that in the no-motivation change case, certain choice behaviours that appear to be inconsistent from the standard rational choice point of view may be explained in our framework as the outcome of conflicting motivations. Afterwards, in the case of motivation change, we present two psychologically-flavoured assumptions about how motivations are influenced by choices. We show that, with some additional weak assumptions of rationality, motivation change leads to a smaller range of potentially inconsistent choices and not to a larger one as one may think. In particular, conflicts between two motivations can eventually be resolved by choosing different actions and consequently a definite and final preference for an action be revealed. |
| Keywords: | Motivation, Pleasure, Self-Image, Conflict, Preference Reversal, Dissonance reduction. |
| JEL: | D01 D03 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1208&r=upt |
| By: | Geert Bekaert (Graduate School of Business, Columbia University); Marie Hoerova (ECB); Marco Lo Duca (ECB) |
| Abstract: | The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility (“uncertainty”), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular. |
| Keywords: | Monetary policy, Option implied volatility, Risk aversion, Uncertainty, Business cycle, Stock market volatility dynamics |
| JEL: | E44 E52 G12 G20 E32 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201210-229&r=upt |