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on Utility Models and Prospect Theory |
| By: | Florent Buisson (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| 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 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00820722&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: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1211&r=upt |
| By: | Denuit, Michel |
| Abstract: | Stochastic dominance permits a partial ordering of alternatives (probability distributions on consequences) based only on partial information about a decision maker’s utility function. Univariate stochastic dominance has been widely studied and applied, with general agreement on classes of utility functions for dominance of different degrees. Extensions to the multivariate case have received less attention and have used different classes of utility functions, some of which require strong assumptions about utility. The multivariate concave stochastic dominance we investigate is a natural extension of the stochastic order typically used in the univariate case and is consistent with a basic preference assumption. The corresponding utility functions are multivariate risk averse, and reversing the preference assumption allows us to investigate stochastic dominance for utility functions that are multivariate risk seeking. We provide insight into these two contrasting forms of stochastic dominance, develop some criteria to compare probability distributions (hence alternatives) via multivariate stochastic dominance, and illustrate how this dominance could be used in practice to identify inferior alternatives. Connections between our approach and dominance using different stochastic orders are discussed. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:louvai:info:hdl:2078.1/125881&r=upt |
| By: | Liang, Che-Yuan (Department of Economics) |
| 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:uunewp:2013_007&r=upt |
| By: | Thierry Madiès (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Marie-Claire Villeval (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Malgorzata Wasmer (Department of Economics - University of Fribourg - University of Fribourg) |
| Abstract: | With a market entry game inspired by Camerer and Lovallo (1999), we study the attitudes of junior and senior employees towards strategic uncertainty and competition. Seniors exhibit higher entry rates compared to juniors, especially when the market capacity is not too low or when earnings from entry depend on relative performance. This difference persists after controlling for attitudes towards non-strategic uncertainty and for beliefs on others' competitiveness and on relative ability. Seniors are more willing to compete when they predict a higher number of competitors. This contradicts the stereotype of less competitive older employees. |
| Keywords: | Aging; risk; ambiguity; competitiveness; confidence; experiment |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00807436&r=upt |