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on Utility Models and Prospect Theory |
| By: | Eric Danan (THEMA - Université de Cergy-Pontoise); Thilbault Gajdos (GREQAM - UNiversité d'Aix-Marseille); Jean-Marc Tallon (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We provide a generalization of Harsanyi (1995)'s aggregation theorem to the case of incomplete preferences at the individual and social level. Individuals and society have possibly incomplete expected utility preferences that are represented by sets of expected utility functions. Under Pareto indifference, social preferences are represented through a set of aggregation rules that are utilitarian in a generalized sense. Strengthening Pareto indifference to Pareto preference provides a refinement of the representation. |
| Keywords: | Incomplete preferences, aggregation, expected multi-utility, utilitarianism. |
| JEL: | D71 D81 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12082&r=upt |
| By: | Robert Chambers (University of Maryland); Margarita Genius (Department of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece) |
| Abstract: | In this article we first develop a theoretically consistent supply-response model for producers with invariant preferences facing price risk, and then we empirically apply the model for a group of Cretan olive-oil producers. For doing so, we estimate a Generalized Leontief cost function and we use the price distribution historically faced by individual farmers to induce three di erent representations of price risk corresponding to the second, third and fourth lp norms. These risk measures are combined with the estimated cost-structure to provide three separate representations of the ecient frontier for the representative producer. Empirical results suggest that, regardless of risk measure used, all farmers curtail production in managing price risk. |
| Keywords: | price risk; invariant risk preferences; producer responses; Cretan olive-oil producers |
| JEL: | C33 C22 D81 Q11 |
| Date: | 2012–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:crt:wpaper:1209&r=upt |
| By: | Enrica Carbone; Gerardo Infante |
| Abstract: | Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found that many agents fail to correctly take into account the length of the planning horizon also finding some support (See Carbone (2006)) for descriptive models, such as the Rolling Model. This paper presents an experimental analysis on the effect of a short planning horizon on intertemporal consumption choices. The purpose of the study is to test whether very short horizons are more easily perceived by agents, allowing them to plan optimally. This experiment tests a somewhat implicit assumption of the Rolling Model, or of similar descriptive approaches, namely that people might be able to use the optimal strategy if they are faced with shorter planning horizons. Moreover, this hypothesis is tested in the cases of decision making under certainty, risk and uncertainty, in order to analyze how these environments may affect the perception of the length of the planning horizon. Results suggest that planning periods have a significant effect on deviations from unconditional optimum in all sequences and all treatments. This finding has been interpreted as evidence of participants not using the optimal strategy. When conditional deviations are considered, results are confirmed only in the case of decision making under uncertainty. This second finding has been interpreted as suggesting that uncertainty on income seems to prevent participants from improving their decision making. |
| Keywords: | Intertemporal Consumer Choice, Life Cycle, Risk, Uncertainty, Laboratory Experiments, Short Planning Horizon. |
| JEL: | D12 D91 D81 C91 C92 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:043&r=upt |
| By: | Nicholas C. Barberis |
| Abstract: | Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis. |
| JEL: | D03 D81 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18621&r=upt |
| By: | YiLi Chien (University of Connecticut); Kanda Naknoi (University of Connecticut) |
| Abstract: | This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances. We construct a stochastic growth multi-country model in which heterogeneous agents face the following restrictions on asset trade. First, the degree of US equity market participation is higher than that of the rest of the world. Second, a fraction of households in every country maintains a fixed share of equity in their portfolios. In our calibrated model, which matches the US net foreign asset position and the equity premium, the average US household loads up more aggregate risk than the average foreign household by investing in a risky asset abroad and issuing a risk-free asset. As a result, the US is compensated by a high risk premium and runs trade deficits even as a debtor country. The long-run average trade deficit in our model accounts for more than 50% of the observed US trade deficit. |
| Keywords: | Global Imbalances, Current Account, Risk Premium, Asset Pricing, Limited Participation |
| JEL: | E21 F32 F41 G12 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-41&r=upt |
| By: | Matros, Philipp; Vilsmeier, Johannes |
| Abstract: | We estimate time series of option implied Probabilities of Default (PoDs) for 19 major US financial institutions from 2002 to 2012. These PoDs are estimated as mass points of entropy based risk neutral densities and subsequently corrected for maturity dependence. The obtained time series are evaluated with regard to their consistency and predictive power and their properties are compared to Credit Default Swap Spreads (CDS). Moreover, we also derive an indicator for the systemic risk in the US financial sector. We find that the PoDs are superior to CDS in identifying the high risk banks prior to the Lehman crisis. -- |
| Keywords: | Entropy Principle,Risk Neutral Density,Probability of Default,Financial Stability Indicator,Credit Default Swaps |
| JEL: | C14 C32 G01 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:302012&r=upt |
| By: | Bahaji, Hamza |
| Abstract: | Ce travail, composé de trois essais, se focalise sur la pertinence du cadre descriptif pour la représentation du comportement décisionnel des agents dans les modèles de la juste valeur des instruments financiers, particulièrement les stock options: Le premier essai traite de la problématique des déterminants du comportement d’exercice des porteurs de stock options. Nos résultats empiriques confirment que ce comportement dépend aussi bien de facteurs rationnels que de facteurs psychologiques. Dans le deuxième essai, nous analysons dans le cadre de la théorie des perspectives l’évaluation subjective des stock options ainsi que leurs effets incitatifs. Les résultats de cette analyse soulignent la pertinence du cadre descriptif pour l'explication de certaines pratiques de rémunération à base de stock options. Le dernier essai introduit un modèle d’évaluation où la décision d’exercice est dictée par les préférences et les anticipations d'un agent représentatif de la théorie des perspectives. Nos résultats empiriques montrent que le modèle proposé sur-performe nettement les modèles issus du cadre normatif proposés dans la littérature. |
| Abstract: | Our research focuses on the relevance of the descriptive framework to the representation of decisional behavior aspects in financial instruments fair value models. This issue is analyzed in the case of stock options through three essays: The first paper gives rise to new behavioral factors affecting exercise decision of stock option holders. These findings underscore the importance of considering behavioral factors in the stock options fair value models. In the second essay we examine stock options subjective valuation and the implied incentive effects to a cumulative prospect theory (CPT) representative employee. Our model predicts that the employee may overestimate the value of his options in-excess of their risk-neutral value. In addition, the model incentive effects predictions are consistent with actual compensation practices. The last essay relies on the CPT framework to provide an alternative approach for the valuation of standard employee stock options and for the analysis of exercise behavior patterns. Our empirical analysis proved that the CPT model is the best performing among many competing models in predicting actual exercise patterns. |
| Keywords: | Fair Value; Decisional Behavior; Cumulative Prospect Theory; Exercise Behavior; Behavioral Finance; Accounting Standards; Juste Valeur; Stock Options; Comportement Décisionnel; Théorie des Perspectives; Comportement d'Exercice; Finance Comportementale; Normes Comptables; |
| JEL: | G11 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/10710&r=upt |