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on Utility Models and Prospect Theory |
| By: | Gaurab Aryal; Dong-Hyuk Kim |
| Abstract: | We study the identification and estimation of first-price auction models with independent private values where bidders are risk averse and there is ambiguity about the valuation distribution. When bidders' preferences are represented by the maxmin expected utility of [Gilboa and Schmeidler, 1989], we provide sufficient conditions for nonparametric identification of the valuation distribution and bidders' attitude toward ambiguity, separately from the risk aversion (CRRA, CARA). We propose a semi-parametric method and apply it to two datasets, one from experimental auctions and the other from USFS timber auctions. We find, for both cases, that bidders are not only risk averse but also ambiguity averse. In addition, we consider the multiplier preferences of [Hansen and Sargent, 2001] and identify the valuation distribution using the same conditions, and show that normalizing, additionally, (any) one quantile of the value, e.g. upper bound of the support, is sufficient to identify the ambiguity parameter separately from the nonparametric utility. |
| Keywords: | first-price auction, identification, Bayesian econometrics, ambiguity aversion |
| JEL: | C11 C44 D44 E61 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2013-607&r=upt |
| By: | Glenn W. Harrison; Jimmy MartÃnez-Correa; J. Todd Swarthout; Eric R. Ulm |
| Abstract: | The theoretical literature has a rich characterization of scoring rules for eliciting the subjective beliefs that an individual has for continuous events, but under the restrictive assumption of risk neutrality. It is well known that risk aversion can dramatically affect the incentives to correctly report the true subjective probability of a binary event, even under Subjective Expected Utility. To address this one can "calibrate" inferences about true subjective probabilities from elicited subjective probabilities over binary events, recognizing the incentives that risk averse agents have to distort reports. We characterize the comparable implications of the general case of a risk averse agent when facing a popular scoring rule over continuous events, and find that these concerns do not apply with anything like the same force. For empirically plausible levels of risk aversion, one can reliably elicit most important features of the latent subjective belief distribution without undertaking calibration for risk attitudes providing one is willing to assume Subjective Expected Utility. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:exc:wpaper:2013-05&r=upt |
| By: | Liang, Che-Yuan (Uppsala Center for Fiscal Studies) |
| Abstract: | In Rawls’ (1971) influential social contract approach to distributive justice, the fair income distribution is the one that an individual would choose behind a veil of ignorance. Harsanyi (1953, 1955, 1975) treats this situation as a decision under risk and arrives at utilitarianism using expected utility theory. This paper investigates the implications of applying prospect theory instead, which better describes behavior under risk. I find that the specific type of inequality in bottom-heavy right-skewed income distributions, which includes the log-normal income distribution, could be socially desirable. The optimal inequality result contrasts the implications of other social welfare criteria. |
| Keywords: | veil of ignorance; prospect theory; social welfare function; income inequality |
| JEL: | D03 D31 D63 D81 |
| Date: | 2013–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uufswp:2013_004&r=upt |
| By: | Luis Rayo (London School of Economics); Arthur Robson (Simon Fraser University) |
| Abstract: | Why did evolution not give us a utility function that is offspring alone? Why do we care intrinsically about other outcomes, such as food, and what determines the intensity of such preferences? A common view is that such other outcomes enhance fitness and the intensity of our preference for a given outcome is proportional to its contribution to fitness. We argue that this view is incomplete. Specifically, we show that in the presence of informational asymmetries, the evolutionarily most desirable preference for a given outcome is determined not only by the significance of the outcome, but by the Agent's degree of ignorance regarding its significance. Our model also sheds light on the phenomena of peer effects and prepared learning, whereby some peer attitudes are more influential than others. |
| Keywords: | Utility, Biological evolution |
| JEL: | D01 D80 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1893&r=upt |
| By: | Le-Yu Chen; Sokbae 'Simon' Lee (Institute for Fiscal Studies and Seoul National University); Myung Jae Sung |
| Abstract: | This paper develops maximum score estimation of preference parameters in the binary choice model under uncertainty in which the decision rule is affected by conditional expectations. The preference parameters are estimated in two stages: we estimate conditional expectations nonparametrically in the first stage and the preference parameters in the second stage based on Manski (1975, 1985)'s maximum score estimator using the choice data and first stage estimates. The paper establishes consistency and derives the rate of convergence of the corresponding two-stage estimator, which is of independent interest for maximum score estimation with generated regressors. The paper also provides results of some Monte Carlo experiments. |
| Keywords: | discrete choice, maximum score estimation, generated regressor, preference parameters, M-estimation, cube root asymptotics |
| JEL: | C12 C13 C14 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:14/13&r=upt |
| By: | He, Xue-Zhong; Treich, Nicolas |
| Keywords: | Prediction market, heterogeneous beliefs, risk aversion, favorite-longshot bias, complete markets, and asset prices. |
| Date: | 2012–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27154&r=upt |
| By: | Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole normale supérieure de Paris - ENS Paris - Institut national de la recherche agronomique (INRA)) |
| Abstract: | We use a non-Bayesian approach to uncertainty which allows for both optimism and pessimism in a simple global game, where each signal can exhibit a bias which is ambiguous. We underline a symmetry between two models of financial crises: a liquidity crisis model, and a currency crisis model. We show that one model with pessimism becomes similar to the other model with optimism, and vice versa, which leads ambiguity to have opposite effects in the two models. We can also rationalize non-neutral effects of shifts in "market sentiment" in these models. |
| Keywords: | Persistence ; Global game ; Financial crises ; Ambiguity ; Optimism ; Pessimism ; Market sentiment ; Coordination |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:hal-00811923&r=upt |
| By: | Giuseppe Albanese (Bank of Italy); Guido de Blasio (Bank of Italy); Paolo Sestito (Bank of Italy) |
| Abstract: | This paper considers the role of preferences in explaining trust. By using the Bank of ItalyÂ’s Survey on Household Income and Wealth (SHIW), the paper shows that time preferences and risk preferences are key covariates of self-reported trust. They both predict negatively a measure of generalized trust; however, risk aversion is positively correlated with an index of particularized trusting behaviour (which refers to family and friends). Moreover, the results are robust to using a different data source to gauge the role of social preferences and personality traits. The study highlights that neglecting preferences when analysing the role of trust in explaining socio-economic outcomes might pose serious challenges in terms of omitted variables. |
| Keywords: | trust, preferences, survey data |
| JEL: | D1 D8 Z1 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_911_13&r=upt |
| By: | Qian Zhao; Jiaqin Wei; Rongming Wang |
| Abstract: | In this paper, we consider the asset-liability management under the mean-variance criterion. The financial market consists of a risk-free bond and a stock whose price process is modeled by a geometric Brownian motion. The liability of the investor is uncontrollable and is modeled by another geometric Brownian motion. We consider a specific state-dependent risk aversion which depends on a power function of the liability. By solving a flow of FBSDEs with bivariate state process, we obtain the equilibrium strategy among all the open-loop controls for this time-inconsistent control problem. It shows that the equilibrium strategy is a feedback control of the liability. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1304.7882&r=upt |
| By: | Peter J. Hammond |
| Abstract: | Harsanyi's original position treats personal identity, upon which each individual's utility depends, as risky. Pattanaik's critique is related to the problem of scaling "state-dependent" von Neumann-Morgenstern utility when determining subjective probabilities. But a unique social welfare functional, incorporating both level and unit interpersonal comparisons, emerges from contemplating an "extended" original position allowing the probability of becoming each person to be chosen. Moreover, the paper suggests the relevance of a "Harsanyi ethical type space", with types as both causes and objects of preference. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd12-298&r=upt |
| By: | Marc Joëts (Ipag Business School and EconomiX-CNRS, University of Paris Ouest, France) |
| Abstract: | This paper proposes to investigate the impact of financialization on energy markets (oil, gas, coal and electricity European forward prices) during both normal times and extreme fluctuation periods through an original behavioral and emotional approach. To this aim, we propose a new theoretical and empirical framework based on a heterogeneous agents model in which fundamentalists and chartists co-exist and are subject to regret and uncertainty. We find significant evidence that energy markets are composed by heterogeneous traders which behave differently depending on the intensity of the price fluctuations and uncertainty context. In particular, energy prices are mainly governed by fundamental and chartist neutral agents during normal times whereas they face to irrational chartist averse investors during extreme fluctuations periods. In this context, the recent energy prices surge can be viewed as the consequence of irrational exhuberance. Our new theoretical model outperforms the random walk in out-of-sample predictive ability. |
| Keywords: | Energy Forward Prices, Financialization, Heterogeneous Agents, Uncertainty Aversion, Regret |
| JEL: | Q43 G15 D81 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.32&r=upt |