nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒03‒09
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Conditional Expected Utility By Massimiliano Amarante
  2. Inequality and Risk Aversion in Health and Income: An Empirical Analysis Using Hypothetical Scenarios with Losses By Ignacio Abásolo; Aki Tsuchiya
  3. Probabilistic Sophistication and Reverse Bayesianism By Edi Karni; Marie-Louise Vierø
  4. Utility maximisation and utility indifference price for exponential semi-martingale models with random factor By Anastasia Ellanskaya; Lioudmila Vostrikova
  5. Financial Risk Aversion and Personal Life History By Alessandro Bucciol; Luca Zarri
  6. Disposition Effect and Loss Aversion: An Analysis Based on a Simulated Experimental Stock Market By Kohsaka Youki; Grzegorz Mardyla; Shinji Takenaka; Yoshiro Tsutsui
  7. Coherence and elicitability By Johanna F. Ziegel
  8. A new approach for an unitary risk theory By Nicolae Popoviciu; Floarea Baicu

  1. By: Massimiliano Amarante
    Abstract: Let E be a class of event. Conditionally Expected Utility decision makers are decision makers whose conditional preferences %E, E 2 E, satisfy the axioms of Subjective Expected Utility theory (SEU). We extend the notion of unconditional preference that is conditionally EU to unconditional preferences that are not necessarily SEU. We give a representation theorem for a class of such preferences, and show that they are Invariant Bi-separable in the sense of Ghirardato et al.[7]. Then, we consider the special case where the unconditional preference is itself SEU, and compare our results with those of Fishburn [6].
    Date: 2013
  2. By: Ignacio Abásolo (Departamento de Economía de las Instituciones, Estadística Económica y Econometría, Facultad de Ciencias Económicas y Empresariales. Universidad de La Laguna, Spain); Aki Tsuchiya (Department of Economics, The University of Sheffield)
    Abstract: Four kinds of distributional preferences are explored: inequality aversion in health, inequality aversion in income, risk aversion in health, and risk aversion in income. Face to face interviews of a representative sample of the general public are undertaken using hypothetical scenarios involving losses in either health or income. Whilst in health risk aversion is stronger than inequality aversion, in the income context we cannot reject that attitudes to inequality aversion and risk aversion are the same. When we compare across contexts we find that inequality aversion and risk aversion are both stronger in income than they each are in health.
    Keywords: inequality; risk aversion; health; income
    JEL: I14 D63 D71
    Date: 2013
  3. By: Edi Karni (Johns Hopkins University); Marie-Louise Vierø (Queen's University)
    Abstract: This paper extends our earlier work on reverse Bayesianism by relaxing the assumption that decision makers abide by expected utility theory, assuming instead weaker axioms that merely imply that they are probabilistically sophisticated. We show that our main results, namely, (modified) representation theorems and corresponding rules for updating beliefs over expanding state spaces and null events that constitute "reverse Bayesianism," remain valid.
    Keywords: Awareness, Unawareness, Reverse Bayesianism, Probabilistic sophistication
    JEL: D8 D81 D83
    Date: 2013–02
  4. By: Anastasia Ellanskaya; Lioudmila Vostrikova
    Abstract: We consider utility maximization problem for semi-martingale models depending on a random factor $\xi$. We reduce initial maximization problem to the conditional one, given $\xi=u$, which we solve using dual approach. For HARA utilities we consider information quantities like Kullback-Leibler information and Hellinger integrals, and corresponding information processes. As a particular case we study exponential Levy models depending on random factor. In that case the information processes are deterministic and this fact simplify very much indifference price calculus. Then we give the equations for indifference prices. We show that indifference price for seller and minus indifference price for buyer are risk measures. Finally, we apply the results to Geometric Brownian motion case. Using identity in law technique we give the explicit expression for information quantities. Then, the previous formulas for indifference price can be applied.
    Date: 2013–03
  5. By: Alessandro Bucciol (Department of Economics (University of Verona)); Luca Zarri (Department of Economics (University of Verona))
    Abstract: Though risk attitude is central to economics and finance, relatively little is known about how it is formed and how it changes over time. Based on US data from a dedicated psycho-social module on lifestyle of the 2010 Health and Retirement Study (HRS), we provide new evidence on the correlation between financial risk attitude and life-history negative events out of an individual’s control. Using observed portfolio decisions to proxy for risk aversion, we find correlation with two of such events: having been in a natural disaster and (especially) the loss of a child. These effects survive after controlling for classic socio-demographic determinants of risk aversion.
    Keywords: Risk Aversion; Financial Asset Ownership; Personal Life History; Behavioral Finance
    JEL: D03 D14 D81 G11
    Date: 2013–02
  6. By: Kohsaka Youki (Center for Finance Research, Waseda University); Grzegorz Mardyla (Faculty of Economics, Kinki University); Shinji Takenaka (Japan Center for Economic Research); Yoshiro Tsutsui (Graduate School of Economics, Osaka University)
    Abstract: We experimentally investigate the existence of and possible origin of the disposition effect. Our approach has three distinct characteristics: Firstly, we created an experimental environment that closely mimics a real stock market and were thus able to obtain and analyze trading behavior data that accurately depicts actual individual investor trading behavior. Secondly, based on a questionnaire survey we conducted during the experiment, we were able to pinpoint each individual participantfs reference point. This, in effect, allowed us to verify an independent hypothesis of the existence of the disposition effect. such an approach differs from the extant literature, where only a joint hypothesis has been examined so far. Thirdly, we measured individual loss aversion coefficients and directly tested whether loss aversion is a cause of the disposition effect. Our results indicate both the existence of the disposition effect as well as prospect theoryfs loss aversion being one of its sources.
    Keywords: disposition effect, loss aversion, investor behavior, experimental economics
    Date: 2013–02
  7. By: Johanna F. Ziegel
    Abstract: The risk of a financial position is usually summarized by a risk measure. As this risk measure has to be estimated from historical data, it is important to be able to verify and compare competing estimation procedures. In statistical decision theory, risk measures for which such verification and comparison is possible, are called elicitable. It is known that quantile based risk measures such as value at risk are elicitable. In this paper we show that law-invariant spectral risk measures such as expected shortfall are not elicitable unless they reduce to minus the expected value. Hence, it is unclear how to perform forecast verification or comparison. However, the class of elicitable law-invariant coherent risk measures does not reduce to minus the expected value. We show that it contains expectiles, and that they play a special role amongst all elicitable law-invariant coherent risk measures.
    Date: 2013–03
  8. By: Nicolae Popoviciu; Floarea Baicu
    Abstract: The work deals with the risk assessment theory. An unitary risk algorithm is elaborated. The algorithm is based on parallel curves. The basic curve of risk is a hyperbolic curve, obtained as a multiplication between the probability of occurrence of certain event and its impact. Section 1 contains the problem formulation. Section 2 contains some specific notations and the mathematical background of risk algorithm. A numerical application based on risk algorithm is the content of section 3. Section 4 contains several conclusions.
    Date: 2013–03

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