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on Utility Models and Prospect Theory |
| By: | Yasuo Kawawaki (Visiting Professor, Osaka School of International Public Policy (OSIPP)) |
| Abstract: | This paper analyzes the relationship between provision of earthquake risk information and residents' willingness to pay (WTP) for disaster risk reduction by the Contingent Valuation Method (CVM), using questionnaire survey data on the purchase of earthquake insurance in the Tokyo Metropolitan Area, Japan. Degree of disaster risk aversion and subjective probability of loss are estimated as parameters of expected utility function in a discrete choice model. The results suggest that when more precise and specific earthquake risk information is provided, residents of vulnerable houses are willing to pay more for disaster risk reduction, with larger subjective probability of loss, while those in safe houses are willing to pay slightly less, with a larger degree of risk aversion. |
| Keywords: | CVM, WTP, Earthquake Insurance, Risk Aversion, Subjective Probability of Loss |
| JEL: | D81 D83 R28 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:12e008&r=upt |
| By: | Manzini, Paola (University of St. Andrews); Mariotti, Marco (University of St. Andrews) |
| Abstract: | We model a boundedly rational agent who suffers from limited attention. The agent considers each feasible alternative with a given (unobservable) probability, the attention parameter, and then chooses the alternative that maximises a preference relation within the set of considered alternatives. Both the preference and the attention parameters are identified uniquely by stochastic choice data. The model is the only one for which the impact of removing any alternative a on the choice probability of any other alternative b is non-negative, asymmetric (either a impacts b or vice-versa), menu independent, neutral (the same on any alternative in the menu), and consistent with the impacts on a and b by a common third alternative. |
| Keywords: | discrete choice, random utility, logit model, consideration sets, bounded rationality, revealed preferences |
| JEL: | D0 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6905&r=upt |
| By: | Marek Petrik; Dharmashankar Subramanian |
| Abstract: | Stochastic domains often involve risk-averse decision makers. While recent work has focused on how to model risk in Markov decision processes using risk measures, it has not addressed the problem of solving large risk-averse formulations. In this paper, we propose and analyze a new method for solving large risk-averse MDPs with hybrid continuous-discrete state spaces and continuous action spaces. The proposed method iteratively improves a bound on the value function using a linearity structure of the MDP. We demonstrate the utility and properties of the method on a portfolio optimization problem. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.4901&r=upt |
| By: | Katsushi S. Imai; Raghav Gaiha; Woojin Kang; Samuel Annim; Ganesh Thapa |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1226&r=upt |
| By: | Joseph Y. Halpern; Samantha Leung |
| Abstract: | We consider a setting where an agent's uncertainty is represented by a set of probability measures, rather than a single measure. Measure-bymeasure updating of such a set of measures upon acquiring new information is well-known to suffer from problems; agents are not always able to learn appropriately. To deal with these problems, we propose using weighted sets of probabilities: a representation where each measure is associated with a weight, which denotes its significance. We describe a natural approach to updating in such a situation and a natural approach to determining the weights. We then show how this representation can be used in decision-making, by modifying a standard approach to decision making-minimizing expected regret-to obtain minimax weighted expected regret (MWER).We provide an axiomatization that characterizes preferences induced by MWER both in the static and dynamic case. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.4853&r=upt |
| By: | Pietro Siorpaes |
| Abstract: | This paper studies the problem of maximizing expected utility from terminal wealth, combining a static position in derivative securities with a traditional dynamic trading strategy in stocks. We work in the framework of a general semi-martingale model and consider a utility function defined on the positive real line. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.5466&r=upt |
| By: | Juliane Brach (The Knowledge Company, Germany and Maastricht School of Management, The Netherlands, Contact: jbrach@knowledgecompany.eu); Willem Spanjers (Kingston University, United Kingdom and Rimini Center for Economic Analysis, Italy. Contact: w.spanjers@kingston.ac.uk) |
| Abstract: | In this paper we provide a coherent framework for analyzing the impact of incalculable political risk, i.e. political ambiguity, on economic development and the choice of development strategy. Using indicators for the levels of internal and external political ambiguity, we analyze the growth paths of MENA countries based on annual data for the period from 1980 to 2008. Succession rules for governments are our indicator for internal political ambiguity, the potential for becoming involved in disruptive international conflicts serves as an indicator for external political ambiguity. Our results show that political ambiguity has a negative impact on both the level of per capita GDP and its growth. Our theoretical model suggests that political ambiguity biases development strategies, leading to an underinvestment in intensive sources of growth. |
| Keywords: | economic development, decision making, ambiguity, development strategy, political economy, Middle East and North Africa |
| JEL: | O14 O33 O53 D81 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:msm:wpaper:2012/39&r=upt |
| By: | Brice Hakwa; Manfred J\"ager-Ambro\.zewicz; Barbara R\"udiger |
| Abstract: | This paper is devoted to the quantification and analysis of marginal risk contribution of a given single financial institution i to the risk of a financial system s. Our work expands on the CoVaR concept proposed by Adrian and Brunnermeier as a tool for the measurement of marginal systemic risk contribution. We first give a mathematical definition of CoVaR_{\alpha}^{s|L^i=l}. Our definition improves the CoVaR concept by expressing CoVaR_{\alpha}^{s|L^i=l} as a function of a state l and of a given probability level \alpha relative to i and s respectively. Based on Copula theory we connect CoVaR_{\alpha}^{s|L^i=l} to the partial derivatives of Copula through their probabilistic interpretation and definitions (Conditional Probability). Using this we provide a closed formula for the calculation of CoVaR_{\alpha}^{s|L^i=l} for a large class of (marginal) distributions and dependence structures (linear and non-linear). Our formula allows a better analysis of systemic risk using CoVaR in the sense that it allows to define CoVaR_{\alpha}^{s|L^i=l} depending on the marginal distributions of the losses of i and s respectively and the copula between L^i and L^s. We discuss the implications of this in the context of the quantification and analysis of systemic risk contributions. %some mathematical This makes possible the For example we will analyse the marginal effects of L^i, L^s and C of the risk contribution of i. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1210.4713&r=upt |
| By: | Saint-Paul, Gilles (University of Toulouse I) |
| Abstract: | Utilitarian foundations for limited government are shaky insofar as they assume rational and consistent individuals. Recently economists' assumption of rational actors has come under sustained attack. Behavioural economics has suggested that people are plagued by irrational biases and inconsistencies. The author elucidates how these developments have led to a post-utilitarianism which is held to justify paternalistic interventions by the state via 'sin taxes', direct bans or new obligations. Individual responsibility is seriously undermined, as is faith in markets. He concludes that supporters of individual freedom need to move away from utilitarian reasoning, reassert core values of autonomy and responsibility, and define strict limits on the scope of government intervention. |
| Keywords: | behavioural economics, utilitarianism, government, paternalism |
| JEL: | B40 D03 D10 H10 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6911&r=upt |