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on Utility Models and Prospect Theory |
| By: | Eric Danan; Thibault Gajdos; Jean-Marc Tallon (THEMA, Universite de Cergy-Pontoise and THEMA; GREQAM, CNRS, Aix-Marseille University; Universite Paris I Pantheon-Sorbonne, CNRS) |
| Abstract: | We provide a generalization of Harsanyi (1955)'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: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2013-05&r=upt |
| By: | Stephen Eliot 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:upf:upfgen:1357&r=upt |
| By: | Lawless, Lydia J.R.; Nayga, Rodolfo; Drichoutis, Andreas |
| Abstract: | Time preferences indicate preferences over streams of future consumption which significantly shape individual decision making including the health domain. In this paper, we review published studies to assess the influence of time preferences on human health behaviour. We first discuss the theoretical background of time preferences; ascertain the differences between private and social discount rates; identify the impact of time preferences on governments of developing nations; and then assess how time preferences influence risky behaviour such as being overweight, smoking, and engaging in risky sexual behaviour. The issue of whether to use proxies or experimental time preference elicitation methods in time preference studies is also addressed. |
| Keywords: | time preference; health domain; risk aversion; discount rate; behaviour |
| JEL: | D90 I0 |
| Date: | 2013–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45382&r=upt |
| By: | Moore, Kyle; Sun, Pengfei; de Vries, Casper G.; Zhou, Chen |
| Abstract: | This paper investigates how the downside tail risk of stock returns is differentiated cross-sectionally. Stock returns follow heavy-tailed distributions with downside tail risk determined by the tail shape and scale. If safety-first investors are concerned with sufficiently large downside losses, i.e. have a sufficiently low risk tolerance, then in the equilibrium, assets traded in the same market share a homogeneous tail shape parameter. Furthermore, if tail shapes are homogeneous, the equilibrium prices of assets are differentiated by the scales. |
| Keywords: | Heavy-tail distribution, safety-first utility, asset pricing |
| JEL: | G11 G12 |
| Date: | 2013–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45592&r=upt |
| By: | Oliver Bunn (Dept. of Economics, Yale University); Caterina Calsamiglia; Donald J. Brown (Dept. of Economics, Yale University) |
| Abstract: | We conduct two experiments where subjects make a sequence of binary choices between risky and ambiguous binary lotteries. Risky lotteries are defined as lotteries where the relative frequencies of outcomes are known. Ambiguous lotteries are lotteries where the relative frequencies of outcomes are not known or may not exist. The trials in each experiment are divided into three phases: pre-treatment, treatment and post-treatment. The trials in the pre-treatment and post-treatment phases are the same. As such, the trials before and after the treatment phase are dependent, clustered matched-pairs, that we analyze with the alternating logistic regression (ALR) package in SAS. In both experiments, we reveal to each subject the outcomes of her actual and counterfactual choices in the treatment phase. The treatments differ in the complexity of the random process used to generate the relative frequencies of the payoffs of the ambiguous lotteries. In the first experiment, the probabilities can be inferred from the converging sample averages of the observed actual and counterfactual outcomes of the ambiguous lotteries. In the second experiment the sample averages do not converge. If we define fictive learning in an experiment as statistically significant changes in the responses of subjects before and after the treatment phase of an experiment, then we expect fictive learning in the first experiment, but no fictive learning in the second experiment. The surprising finding in this paper is the presence of fictive learning in the second experiment. We attribute this counterintuitive result to apophenia: "seeing meaningful patterns in meaningless or random data." A refinement of this result is the inference from a subsequent Chi-squared test, that the effects of fictive learning in the first experiment are significantly different from the effects of fictive learning in the second experiment. |
| Keywords: | Uncertainty, Counterfactual outcomes, Apophenia |
| JEL: | C23 C35 C91 D03 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1890&r=upt |
| By: | Anna Bartczak (Faculty of Economic Sciences, University of Warsaw); Susan Chilton (Newcastle University Business School); Jürgen Meyerhoff (Technische Universität Berlin, Institute for Landscape and Environmental Planning) |
| Abstract: | A recent innovation in environmental valuation surveys has been to acknowledge the inherent uncertainties surrounding the provision of environmental goods and services and to incorporate it into non-market survey designs. So far, little is known about how people assimilate and respond to such uncertainty, particularly in terms of how it affects their stated valuations. In this paper we focus on the impact of risk preferences on people’s investments in environment. Individual risk preferences are elicited through a standard, incentivized multiple price list mechanism and used as a independent variable in the analysis of a choice experiment valuing the preservation of two threatened lynx populations in Poland. We find that risk-seeking respondents were more likely to choose the status quo option, which was the riskiest option in terms of the survival of the two distinct lynx populations. Risk seekers revealed also a significantly lower willingness to pay for lynx preservations. |
| Keywords: | choice experiment, environmental good, lottery experiment, lynx preservation, risk preferences, status quo effect |
| JEL: | Q23 Q51 Q56 Q57 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2013-09&r=upt |
| By: | Moore, Kyle; Sun, Pengei; de Vries, Casper G.; Zhou, Chen |
| Abstract: | We analyze the cross-sectional differences in the tail risk of equity returns and identify the drivers of tail risk. We provide two statistical procedures to test the hypothesis of cross-sectional downside tail shape homogeneity. An empirical study of 230 US non-financial firms shows that between 2008 and 2011 the cross-sectional tail shape is homogeneous across equity returns. The heterogeneity in tail risk over this period can be entirely attributed to differences in scale. The differences in scales are driven by the following firm characteristics: market beta, size, book-to-market ratio, leverage and bid-ask spread. |
| Keywords: | Extreme Value Theory, Hypothesis Testing, Tail Index, Tail Risk |
| JEL: | C12 G11 G12 |
| Date: | 2013–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45591&r=upt |