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on Utility Models and Prospect Theory |
| By: | Malakhov, Sergey |
| Abstract: | The synthesis of the G.Sigler’s rule of the optimal search with the classical individual labor supply model enlarges the understanding of the phenomenon of money flexibility. The constraints of the search model makes the Lagrangian multiplier equal to the marginal utility of the wage rate and establish the correspondence between the purchase price elasticity of the marginal utility of consumption expenditures, the wage rate elasticity of the marginal utility of money, and the wage rate elasticity of purchase prices. This correspondence can review the “leisure model” of behavior as well as the Veblen effect. The phenomenon of the sunk costs sensitivity also becomes more understandable. |
| Keywords: | money flexibility, consumption leisure choice, search, Veblen effect |
| JEL: | D11 D83 |
| Date: | 2013–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45197&r=upt |
| By: | Gaurab Aryal; Ronald Stauber |
| Abstract: | We introduce and analyze three definitions of equilibrium for finite extensive games with imperfect information and ambiguity averse players. In a setting where players' preferences are represented by maxmin expected utility as characterized in Gilboa and Schmeidler (1989), our definitions capture the intuition that players may consider the possibility of slight mistakes, analogous to the intuition leading to trembling-hand perfect equilibrium as introduced in Selten (1975). We prove existence for two of our equilibrium notions, and relate our definitions to standard equilibrium concepts with expected utility maximizing players. Our analysis shows that ambiguity aversion can lead to distinct behavioral implications, even if ambiguous beliefs only arise from the possibility of slight mistakes in the implementation of unambiguous strategies. |
| Keywords: | Extensive games; Ambiguity; Maxmin |
| JEL: | C72 D81 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2013-606&r=upt |
| By: | André Lapied (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Thomas Rongiconi (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | The "General-Self-Control-Preference" model introduced by Noor and Takeoka (2010) allows to take into account non linear costs of Self-Control. In this paper we extend this theory to situations in which a decision-maker faces ambiguity. We focus on the fact that lack of information is a potential source of temptation. Indeed lack of information doesn't allow the decision-maker to put a probability measure on uncertain events. Our basic hypothesis is that, in ambiguous situation, individuals are not confident enough about their beliefs and could therefore be tempted to use other beliefs to evaluate the alternatives in the second period. We study a two period model where ex ante dominated choice may tempt the decision-maker in the second period. Individuals have preferences over sets of alternatives that represent second period choices. We provide a Choice-Theoretic model where the ex-ante belief is a probability measure whereas ex post belief is a Choquet-capacity, in order to take into account individual attitudes towards ambiguity in the second period. |
| Keywords: | Temptation, Self-control, Ambiguity, Choquet-Expected-Utility, Comonotonic-Temptation-Independence. |
| JEL: | D81 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1316&r=upt |
| By: | Binswanger, Johannes (Tilburg University); Salm, Martin (Tilburg University) |
| Abstract: | We investigate the relationship between subjective probabilities of future stock market returns and decisions about stockholding. Specifically, we examine whether acting upon subjective probabilities is confined to individuals with high cognitive skills. We explore this question using data from the U.S. Health and Retirement Study (HRS). Our empirical analysis is guided by a novel and simple model based on the dual-systems framework from psychology (Kahneman, 2003). In our model, individuals with low cognitive skills make decisions in an intuitive non-probabilistic way based on cues and feelings. Individuals with high cognitive skills make decisions akin to the expected utility model. As predicted by our model, in our empirical analysis we find that there is a significantly stronger association between subjective return probabilities and stockholding decisions for individuals with high cognitive skills, compared to individuals with lower cognitive skills. The paper contributes to a better understanding of the role of cognitive skills in decision making under uncertainty. |
| Keywords: | subjective expectations, probabilities, dual system decision making, cognitive skills, cognitive economics |
| JEL: | D03 D81 D84 G11 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7265&r=upt |
| By: | Füllbrunn, Sascha; Rau, Holger; Weitzel, Utz |
| Abstract: | Despite ample evidence of ambiguity preferences in individual decision making, experimental studies of ambiguity effects in financial markets are scarce and inconclusive. Although a number of theoretical studies explain empirical puzzles in finance with ambiguity preferences, it is not a given that individual ambiguity effects survive in markets. We therefore combine the predominant design for ambiguous prospects in individual decision making, the two-color Ellsberg urn, with predominant designs in financial trading, the double auction and the call market, and compare trading in risky and in ambiguous assets. Our results suggest that markets are able to wash out ambiguity effects, which we do observe in an individual decision making control. We find no effects on transaction prices or quotes and also no effects on volume, volatility, or portfolios. This applies both to double auctions and call markets, with and without simultaneous trading of risky and ambiguous assets, and even in the absence of arbitrage. |
| Keywords: | ambiguity, experiment, trading, double auction, call market |
| JEL: | D03 G12 G14 |
| Date: | 2013–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44700&r=upt |
| By: | Stephen Hansen; Michael McMahon |
| Abstract: | In many areas of economics there is a growing interest in how expertise and preferences drive individual and group decision making under uncertainty. Increasingly, we wish to estimate such models to quantify which of these drive decision making. In this paper we propose a new channel through which we can empirically identify expertise and preference parameters by using variation in decisions over heterogeneous priors. Relative to existing estimation approaches, our "Prior-Based Identification" extends the possible environments which can be estimated, and also substantially improves the accuracy and precision of estimates in those environments which can be estimated using existing methods. |
| Keywords: | Bayesian decision making, expertise, preferences, estimation |
| JEL: | D72 D81 C13 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:683&r=upt |
| By: | Dimitrov, Dinko; Mukherjee, Saptarshi; Muto, Nozomu |
| Abstract: | When encountering a set of alternatives displayed in the form of a list, the decision maker usually determines a particular alternative, after which she stops checking the remaining ones, and chooses an alternative from those observed so far. We present a framework in which both decision problems are explicitly modeled, and axiomatically characterize a stop-and-choose rule which unifies position-biased successive choice and satisficing choice. |
| Keywords: | choice function, list, satisficing choice, stopping decision, successive choice |
| JEL: | D00 D11 D83 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2013-02&r=upt |