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on Utility Models and Prospect Theory |
| By: | Qiu, Jianying; Weitzel, Utz |
| Abstract: | Abstract Popular models for decision making under ambiguity assume that people use not one but multiple priors. This paper is a first attempt to experimentally elicit multiple priors. In an ambiguous scenario with two underlying states we measure a subject’s single prior, her other potential priors (multiple priors), her confidence in these priors valuation of an ambiguous asset with the same underlying states. We also investigate subjects' updating of (multiple) priors after receiving signals about the true states. We find that single priors are best understood as a confidence-weighted average of multiple priors. Single priors also predict the valuation of ambiguous assets best, while both the minimum and maximum of subjects' multiple priors add explanatory power. This provides some but no exclusive support for the maxmin (Gilboa and Schmeidler, 1989) and the alpha maxmin model (Ghirardato et al., 2004). With regard to updating of priors, we do not observe strong deviations from Bayesian learning, although subjects overadjust/underadjust their priors and their confidence in multiple priors after a contradictory/confirming signal. Subjects also react to neutral information with more confidence in their priors. This holds under ambiguity, but not in a comparison treatment under risk. |
| Keywords: | ambiguity; uncertainty; risk; multiple priors; Bayesian updating; first-order beliefs; second-order beliefs |
| JEL: | D46 D83 C91 |
| Date: | 2013–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43974&r=upt |
| By: | Stephen G. Dimmock; Roy Kouwenberg; Olivia S. Mitchell; Kim Peijnenburg |
| Abstract: | We measure ambiguity attitudes for a representative sample of US households using a custom-designed module in the American Life Panel. Ambiguity attitudes vary substantially across people: half are ambiguity averse, 12% are ambiguity neutral, and 37% are ambiguity seeking. Further, ambiguity attitudes depend on the likelihood of the ambiguous event: people tend to overweight low-likelihood ambiguous events and underweight high-likelihood events, a phenomenon called ambiguity-likelihood insensitivity. Consistent with theoretical predictions, higher ambiguity aversion is associated with less equity market participation, lower portfolio allocations to equities, and more retirement planning. High ambiguity-likelihood insensitivity is associated with a higher probability of being insured. |
| JEL: | C83 D14 D81 G11 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18743&r=upt |
| By: | Doepke, Matthias (Northwestern University); Zilibotti, Fabrizio (University of Zurich) |
| Abstract: | We construct a theory of intergenerational preference transmission that rationalizes the choice between alternative parenting styles (related to Baumrind 1967). Parents maximize an objective function that combines Beckerian and paternalistic altruism towards children. They can affect their children's choices via two channels: either by influencing their preferences or by imposing direct restrictions on their choice sets. Different parenting styles (authoritarian, authoritative, and permissive) emerge as equilibrium outcomes, and are affected both by parental preferences and by the socioeconomic environment. We consider two applications: patience and risk aversion. We argue that parenting styles may be important for explaining why different groups or societies develop different attitudes towards human capital formation, entrepreneurship, and innovation. |
| Keywords: | intergenerational preference transmission, altruism, paternalism, entrepreneurship, innovation |
| JEL: | D10 J10 O10 O40 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7108&r=upt |
| By: | van der Heijden, Eline (Tilburg University); Klein, Tobias J. (Tilburg University); Müller, Wieland (University of Vienna); Potters, Jan (Tilburg University) |
| Abstract: | We confront a representative sample of one 1,102 Dutch individuals with a series of incentivized investment decisions and also elicit their time preferences. There are two treatments that differ in the frequency at which individuals decide about the invested amount. The low frequency treatment stimulates decision makers to frame a sequence of risky decisions broadly rather than narrowly. We find that the framing effect is significantly larger for impatient than for patient individuals. This result is robust to controlling for various economic and demographic variables and for cognitive ability. |
| Keywords: | framing, choice under risk, time preference, experiment |
| JEL: | C93 D03 D81 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7085&r=upt |
| By: | Margaret Meyer; Florian Ederer; Richard Holden |
| Abstract: | It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments. Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent. If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment. |
| Keywords: | Contracts, incentives, gaming, strategic ambiguity, randomization |
| JEL: | L13 L22 |
| Date: | 2013–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:640&r=upt |
| By: | Kensuke Ishitani; Takashi Kato |
| Abstract: | In this paper, we study an optimal execution problem in the case of uncertainty in market impact to derive a more realistic market model. Our model is a generalized version of that in Kato(2009), where a model of optimal execution with deterministic market impact was formulated. First, we construct a discrete-time model as a value function of an optimal execution problem. We express the market impact function as a product of a deterministic part (an increasing function with respect to the trader's execution volume) and a noise part (a positive random variable). Then, we derive a continuous-time model as a limit of a discrete-time value function. We find that the continuous-time value function is characterized by an optimal control problem with a L\'evy process and investigate some of its properties, which are mathematical generalizations of the results in Kato(2009). We also consider a typical example of the execution problem for a risk-neutral trader under log-linear/quadratic market impact with Gamma-distributed noise. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1301.6485&r=upt |
| By: | Vladimir Danilov (Central Economics and Mathematics Institute, Russian Academy of Sciences); Gleb Koshevoy (Central Economics and Mathematics Institute, Russian Academy of Sciences); Frank Page (Department of Economics, Indiana University); Myrna Wooders (Vanderbilt University) |
| Abstract: | We introduce a new approach to showing existence of equilibrium in models of economies with unbounded short sales. Inspired by the pioneering works of Hart (1974) on asset market models, Grandmont (1977) on temporary economic equilibrium, and of Werner (1987) on general equilibrium exchange economies, all papers known to us stating conditions for existence of equilibrium with unbounded short sales place conditions on recession cones of agents' preferred sets or, more recently, require compactness of the utility possibilities set. In contrast, in this paper, we place conditions on the preferred sets themselves. Roughly, our condition is that the sum of the weakly preferred sets is a closed set. We demonstrate that our condition implies existence of equilibrium. In addition to our main theorem, we present two theorems showing cases to which our main theorem can we applied. We also relate our condition to the classic condition of Hart (1974). |
| Keywords: | arbitrage, unbounded short sales, asset market models, sum of weakly preferred sets, existence of equilibrium |
| JEL: | C3 D5 |
| Date: | 2012–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-12-00002&r=upt |
| By: | Wolfgang Kuhle (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | This paper develops a method to study how life-cycle utility of a sequence of cohorts converges towards its steady state level in the neoclassical two-generations-overlapping model. This method allows to characterize utility changes associated with variations in exogenous policy parameters along the entire transition path between two steady states. At the same time it is not more complicated than a pure steady state analysis. Moreover, it can be applied to economies for which an explicit solution of the transition path is not available. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2012_22&r=upt |