nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒05‒11
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Prospect Theory and consumer behavior: Goals and Tradeoffs. By Florent Buisson
  2. Dual theory of choice under multivariate risks . By Galichon, Alfred; Henry, Marc
  3. Expected Utility, Risk, and Market Behavior: Theory and Evidence from the Fed Cattle Market By Fausti, Scott W.; Wang, Zhiguang; Lange, Brent
  4. Equilibrium Theory under Ambiguity By Wei He; Nicholas C. Yannelis
  5. Effects of Tactical Responses and Risk Aversion on Farm Wheat Supply By Kingwell, Ross S.
  6. Sovereign Default Risk and Uncertainty Premia By Ignacio Presno; Demian Pouzo
  7. Religious Activity, Risk Taking Preferences, and Financial Behaviour: Empirical Evidence from German Survey Data By Anja Koebrich Leon; Christian Pfeifer
  8. Noisy retrievers and the four-fold reaction to rare events By Davide Marchiori; Sibilla Di Guida; Ido Erev
  9. A comparison of techniques for dynamic risk measures with transaction costs By Zachary Feinstein; Birgit Rudloff
  10. Heterogeneous Beliefs and Prediction Market Accuracy By He, Xue-Zhong; Treich, Nicolas
  11. Conditional Betas and Investor Uncertainty By Fernando D. Chague

  1. By: Florent Buisson (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: I show that a loss averse consumer who must share her budget between two goods prefer allocations for which consumption equals reference point for at least one good. The phenomenon intensity depends on the curvature of the utility curve. These results are consistent with several stylized facts which cannot be explained by the standard consumer theory.
    Keywords: Loss aversion, prospect theory.
    JEL: D03 D11 D83
    Date: 2013–03
  2. By: Galichon, Alfred (Département d'économie); Henry, Marc
    Abstract: We propose a multivariate extension of Yaari's dual theory of choice under risk. We show that a decision maker with a preference relation on multidimensional prospects that preserves ¯rst order stochastic dominance and satis¯es comonotonic in-dependence behaves as if evaluating prospects with a weighted sum of quantiles. Both the notions of quantiles and of comonotonicity are extended to the multivariate framework using optimal transportation maps. Finally risk averse decision makers are characterized, and we show how to efficiently compute the functionals they use to evaluate prospects.
    Keywords: Risk; Rank dependent utility theory; Multivariate comonotonicity; Optimal transportation; Multi-attribute inequality; Gini evaluation functions;
    JEL: D81 C61
    Date: 2012–07
  3. By: Fausti, Scott W.; Wang, Zhiguang; Lange, Brent
    Keywords: Risk and Uncertainty, Q10,
    Date: 2013–03
  4. By: Wei He; Nicholas C. Yannelis
    Date: 2013
  5. By: Kingwell, Ross S.
    Keywords: Crop Production/Industries, Risk and Uncertainty,
    Date: 2013–04–16
  6. By: Ignacio Presno (Federal Reserve Bank of Boston); Demian Pouzo (UC at Berkeley)
    Abstract: This paper develops a general equilibrium model of sovereign debt with endogenous default. Foreign lenders fear that the probability model which dictates the evolution of the endowment of the borrower is misspecied. To compensate for the risk and uncertainty-adjusted probability of default, they demand higher returns on their bond holdings. In contrast with the existing literature on sovereign default, we are able to match the average bond spreads observed in the data together with the standard empirical regularities of emerging economies. The technical contribution of the paper lies in extending the methodology of McFadden (1981) to compute equilibrium allocations and prices using the discrete state space (DSS) technique in the context of risk and uncertainty aversion on the lenders' side.
    Date: 2012
  7. By: Anja Koebrich Leon (Institute of Economics, Leuphana University Lueneburg, Germany); Christian Pfeifer (Institute of Economics, Leuphana University Lueneburg, Germany)
    Abstract: Individual preferences with respect to risk taking play an important role in financial economic behaviour and, hence, in financial markets. Using German microdata, we argue that individual religiosity is a determinant of household willingness to take risks, since it shapes relevant individual values and norms. Controlling for overall level of general risk assessment, firstly, we find that different religious affiliations are associated with distinct financial risk-taking attitudes. Adherents to the two main Christian religions in Germany (Protestants and Catholics) are less risk-tolerant in general, but not in financial concerns. The same holds for Muslims. Further, religious involvement is associated with higher risk aversion. Secondly, we examine the extent to which religion-induced heterogeneity in risk-taking preferences actually influences investment decisions of individuals in Germany. We provide evidence suggesting that religious beliefs and religious involvement influence individual portfolio decisions.
    Keywords: church; religion; risk aversion; portfolio choice
    JEL: D14 G11 Z12
    Date: 2013–04
  8. By: Davide Marchiori (Department of Management, Università Ca' Foscari Venezia); Sibilla Di Guida (SBS-EM, ECARES, Universite Libre de Bruxelles); Ido Erev (Faculty of Industrial Engineering and Management, Technion)
    Abstract: Previous research documents two pairs of inconsistent reactions to rare events: 1) Studies of probability judgment reveal conservatism which implies overestimation of rare events, and overconfidence which implies underestimation of rare events. 2) Studies of choice behavior reveal overweighting of rare events in one-shot tasks, and the opposite bias in decisions from experience. The current analysis and experimental results demonstrate that the coexistence and relative importance of the four biases can be captured with simple models that share the assumption that judgments and decisions are made based on the information conveyed by small and noisy samples of past experiences.
    Keywords: Black swan; prospect theory; experience-description gap; case-based decision theory; overgeneralization
    JEL: C79 C91 D81
    Date: 2013–04
  9. By: Zachary Feinstein; Birgit Rudloff
    Abstract: This paper contains an overview of results for dynamic risk measures in markets with transaction costs. We provide the main results of four different approaches. We will prove under which assumptions results within these approaches coincide, and how properties like primal and dual representation and time consistency in the different approaches compare to each other.
    Date: 2013–05
  10. By: He, Xue-Zhong; Treich, Nicolas
    Abstract: We consider a prediction market in which traders have heterogeneous prior beliefs in probabilities. In the two-state case, we derive necessary and sufficient conditions so that the prediction market is accurate in the sense that the equilibrium state price equals the mean probabilities of traders' beliefs. We also provide a necessary and sufficient condition for the well documented favorite-longshot bias. In an extension to many states, we revisit the results of Varian (1985) on the relationship between equilibrium state price and belief heterogeneity.
    Keywords: Prediction market, heterogeneous beliefs, risk aversion, favorite-longshot bias, complete markets, and asset prices.
    Date: 2012–08–20
  11. By: Fernando D. Chague
    Abstract: We derive theoretical expressions for market betas from a rational expectation equilibrium model where the representative investor does not observe if the economy is in a recession or an expansion. Market betas in this economy are time-varying and related to investor uncertainty about the state of the economy. The dynamics of betas will also vary across assets according to the assets' cash-flow structure. In a calibration exercise, we show that value and growth firms have cash-flow structures that imply an opposing beta dynamics that goes in the direction of solving the value premium puzzle. During high uncertainty periods, value betas are higher while growth betas are lower. We estimate conditional betas empirically using proxies for investor uncertainty and show support of the model's prediction about the dynamics of growth and value betas.
    Keywords: Conditional CAPM, Conditional Betas, Uncertainty
    JEL: G12 E32 D80
    Date: 2013–04–16

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