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on Utility Models and Prospect Theory |
| By: | Christian Robert (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Pierre-Emmanuel Thérond (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429) |
| Abstract: | We consider the class of concave distortion risk measures to study how choice is influenced by the decision-maker's attitude to risk and provide comparative static results. We also assume ambiguity about the probability distribution of the risk and consider a framework à la Klibanoff, Marinacci and Mukerji (2005) to study the value of information that resolves ambiguity. We show that this value increases with greater ambiguity, with greater ambiguity aversion, and in some cases with greater risk aversion. Finally we examine whether a more risk-averse and a more ambiguity-averse individual will invest in more effort to shift his initial risk distribution to a better target distribution. |
| Keywords: | Ambiguity ; dual theory ; risk measures ;distorsion ; optimal effort |
| Date: | 2013–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00813199&r=upt |
| By: | Andersson, Ola (Research Institute of Industrial Economics (IFN)); Tyran, Jean-Robert (University of Vienna); Wengström, Erik (University of Copenhagen); Holm, Håkan J. (Lund University) |
| Abstract: | Recent experimental studies suggest that risk aversion is negatively related to cognitive ability. In this paper we report evidence that this relation might be spurious. We recruit a large subject pool drawn from the general Danish population for our experiment. By presenting subjects with choice tasks that vary the bias induced by random choices, we are able to generate both negative and positive correlations between risk aversion and cognitive ability. Structural estimation allowing for heterogeneity of noise yields no significant relation between risk aversion and cognitive ability. Our results suggest that cognitive ability is related to random decision making, rather than to risk preferences. |
| Keywords: | Risk preference; Cognitive ability; Experiment; Noise |
| JEL: | C81 C91 D12 D81 |
| Date: | 2013–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0964&r=upt |
| By: | Irina Penner (Institut für Mathematik - Humboldt Universität zu Berlin); Anthony Reveillac (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine) |
| Abstract: | The paper analyzes risk assessment for cash flows in continuous time using the notion of convex risk measures for processes. By combining a decomposition result for optional measures, and a dual representation of a convex risk measure for bounded \cd processes, we show that this framework provides a systematic approach to the both issues of model ambiguity, and uncertainty about the time value of money. We also establish a link between risk measures for processes and BSDEs. |
| Keywords: | Convex risk measures for processes; Discounting ambiguity; Model ambiguity; Cash subadditivity; Decomposition of optional measures, BSDEs |
| Date: | 2013–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00814702&r=upt |
| By: | Geoffrey Heal; Antony Millner |
| Abstract: | Uncertainty is intrinsic to climate change: we know that the climate is changing, but not precisely how fast or in what ways. Nor do we understand fully the social and economic consequences of these changes, or the options that will be available for reducing climate change. Furthermore the uncertainty about these issues is not readily quantified and expressed in probabilistic terms: we are facing deep uncertainty or ambiguity rather than risk in the classical sense, rendering the classical expected utility framework of limited value. We review the sources of uncertainty about all aspects of climate change and resolve these into various components, commenting on their relative importance. Then we review decision-making frameworks that are appropriate in the absence of quantitative probabilistic information, including non-probabilistic approaches and those based on multiple priors, and discuss their application in climate change economics. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:lsg:lsgwps:wp108&r=upt |
| 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 the disposition effect and loss aversion as its potential cause. Our approach includes three key characteristics: (i) An environment closely mimicking actual stock markets; (ii) Individual-specific reference prices; (iii) A direct test of loss aversion as a cause of the disposition effect. We find strong support for the existence of the disposition effect as an independent hypothesis. This is an improvement over previous studies, which tested this hypothesis only jointly with others. Our results also strongly point to loss aversion, of the type postulated by prospect theory, being a source of the disposition effect. |
| Keywords: | disposition effect, loss aversion, investor behavior, experimental economics |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1302r&r=upt |
| By: | Elaine Liu (University of Houston); JiKun Huang (Center for Chinese Agricultural Policy) |
| Abstract: | Despite insect-resistant Bt cotton has been lauded for its ability to reduce the use of pesticides, studies have shown that Chinese Bt cotton farmers continue to use excessive amounts of pesticides. Using results from a survey and an artefactual field experiment, we find that farmers who are more risk averse use greater quantities of pesticides. We also find that farmers who are more loss averse use lesser quantities of pesticides. This result is consistent with our conceptual framework and suggestive evidence where farmers behave in a loss averse manner in the health domain and place more weight on the importance of health over money in the loss domain. |
| Keywords: | Risk Preferences, Prospect Theory, Pesticide Use |
| JEL: | O13 O14 O33 D03 D81 D83 |
| Date: | 2013–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:hou:wpaper:201310920&r=upt |
| By: | Christopher J. Tyson (Queen Mary, University of London) |
| Abstract: | A discrete symmetry of a preference relation is a mapping from the domain of choice to itself under which preference comparisons are invariant; a continuous symmetry is a one-parameter family of such transformations that includes the identity; and a symmetry field is a vector field whose trajectories generate a continuous symmetry. Any continuous symmetry of a preference relation implies that its representations satisfy a system of PDEs. Conversely the system implies the continuous symmetry if the latter is generated by a field. Moreover, solving the PDEs yields the functional form for utility equivalent to the symmetry. This framework is shown to encompass a variety of representation theorems related to univariate separability, multivariate separability, and homogeneity, including the cases of Cobb-Douglas and CES utility. |
| Keywords: | Continuous symmetry, Separability, Smooth preferences, Utility representation |
| JEL: | C60 D01 D81 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp702&r=upt |
| By: | Oliver Bunn; Caterina Calsamiglia; Donald Brown |
| Date: | 2013–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000660&r=upt |
| By: | Jonas Fooken; Markus Schaffner |
| Abstract: | We study the difference in the result of two different risk elicitation methods by linking estimates of risk attitudes to gender, age, personality traits, a decision in a dilemma situation, and physiological states measured by heart rate variability (HRV). Our results indicate that differences between the methods are reflected in a different effect of gender and personality traits. Furthermore, HRV is linked to risk-taking in the experiment for one of the methods, suggesting that emotionally more stressed individuals display more risk aversion. However, we cannot determine if these are significantly related to the difference on the results of the two methods. Finally, we find that risk attitudes are not predictive of the ability to decide in a dilemma, but personality traits are. There is also no apparent relationship between the physiological state during the dilemma situation and the ability to make a decision. |
| Keywords: | s risk preferences |
| JEL: | D81 D87 |
| Date: | 2013–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:qut:qubewp:wp010&r=upt |
| By: | Pierpaolo Pierani; Silvia Tiezzi |
| Abstract: | This paper deals with one of the main theoretical and empirical problems associated with the rational addiction model, namely that the demand equation derived from the rational addiction theory is not empirically distinguishable from models with forward-looking behavior, but with timeinconsistent preferences. The implication is that, even when forward-looking behavior can be convincingly supported, this equation cannot provide evidence in favor of time-consistent preferences against a model with dynamic inconsistency. In fact, we show that the possibility of testing for exponential versus non-exponential time discounting is nested within the rational addiction model. We propose a test of time consistency that uses only the information obtained from the general rational addiction demand equation and the price effects. A pseudo panel of Italian households is used to test for rational addiction in tobacco consumption. GMM estimators are used to deal with errors in variables and unobserved heterogeneity. The results conform to the theoretical predictions. We find evidence that tobacco consumers are forward-looking, but timeinconsistent. The values of the derived present bias and long run discount parameters are statistically significant and in line with the literature. |
| Keywords: | rational addiction, time inconsistency, GMM |
| JEL: | C23 D03 D12 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:666&r=upt |
| By: | Bilkic, Natasa (University of Paderborn); Gries, Thomas (University of Paderborn); Naudé, Wim (Maastricht School of Management) |
| Abstract: | We refine modelling of the radical innovation decision in this paper by extending real option theory to include non-marginal stochastic jump processes. From the model analytics we determine that the average magnitude and frequency of non-marginal stochastic jump processes are the most important parameters in this highly uncertain decision process. We show that these stochastic shocks imply that investment in radical innovation may very often be too time consuming and/or expensive to remain attractive for private entrepreneurs. |
| Keywords: | radical innovation, innovation, entrepreneurship, investment, R&D, risk, real option theory, technology |
| JEL: | D92 D81 L26 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7338&r=upt |