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on Utility Models and Prospect Theory |
| By: | Donkers, A.C.D.; Lourenço, C.J.S.; Dellaert, B.G.C.; Goldstein, D.G. |
| Abstract: | In this paper we propose the use of preferred outcome distributions as a new method to elicit individuals’ value and probability weighting functions in decisions under risk. Extant approaches for the elicitation of these two key ingredients of individuals’ risk attitude typically rely on a long, chained sequence of lottery choices. In contrast, preferred outcome distributions can be elicited through an intuitive graphical interface, and, as we show, the information contained in two preferred outcome distributions is sufficient to identify non-parametrically both the value function and the probability weighting function in rank-dependent utility models. To illustrate our method and its advantages, we run an incentive-compatible lab study in which participants use a simple graphical interface – the Distribution Builder (Goldstein et al. 2008) – to construct their preferred outcome distributions, subject to a budget constraint. Results show that estimates of the value function are in line with previous research but that probability weighting biases are diminished, thus favoring our proposed approach based on preferred outcome distributions. |
| Keywords: | decision making;rank dependent utility;risk preference;distribution builder;micro economics;preference elicitation |
| Date: | 2013–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765039958&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 Identication" 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: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-18&r=upt |
| By: | Tamini, Lota |
| Abstract: | This paper analyzes the impact of risk and ambiguity aversion - Knightian uncertainty - on the choice of optimal quality and timing of market entry in the agri-food sector. Irreversibility of the investment in product development is introduced in a continuous-time stochastic model applying the real option literature. We consider a market characterized by a duopoly with a Stackelberg-Nash game for quality choice. When the follower provides a higher- quality good, the level of quality is decreasing in ambiguity aversion while it is a non-monotonic function of the level of risk. For low levels of risk, the increase of product quality is an efficient response. Up to certain threshold level of risk, risk and ambiguity aversion reduce the optimal quality level and increase the value of waiting when the follower supplies a higher-quality good. The implication is that risk and ambiguity aversion allow the leader to make a sustainable monopoly pro t. When the follower supplies a lower-quality good, there is no value for it to wait. It should therefore provide the lowest-quality good possible. In a vertically integrated supply chain rms provide higher quality, and the di¤erence between vertically integrated and non-integrated rms is increasing in risk and ambiguity aversion. |
| Keywords: | Quality, Duopoly, Real option, Vertical integration, Risk, Knightian uncertainty., Industrial Organization, Institutional and Behavioral Economics, Livestock Production/Industries, D81, L12, L15, |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ags:spaawp:148589&r=upt |
| By: | Herings P.J.J.; Houba H (GSBE) |
| Abstract: | We analyze the Condorcet paradox within a strategic bargaining model with majority voting, exogenous recognition probabilities, and no discounting. Stationary subgame perfect equilibria (SSPE) exist whenever the geometric mean of the players' risk coefficients, ratios of utility differences between alternatives, is at most one. SSPEs ensure agreement within finite expected time. For generic parameter values, SSPEs are unique and exclude Condorcet cycles. In an SSPE, at least two players propose their best alternative and at most one player proposes his middle alternative with positive probability. Players never reject best alternatives, may reject middle alternatives with positive probability, and reject worst alternatives. Recognition probabilities represent bargaining power and drive expected delay. Irrespective of utilities, no delay occurs for suitable distributions of bargaining power, whereas expected delay goes to infinity in the limit where one player holds all bargaining power. Contrary to the case with unanimous approval, a player benefits from an increase in his risk aversion. |
| Keywords: | Stochastic and Dynamic Games; Evolutionary Games; Repeated Games; |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013021&r=upt |
| By: | Giuseppe Attanasi; Pierpaolo Battigalli; Elena Manzoni |
| Abstract: | In the theory of psychological games it is assumed that players' preferences on material consequences depend on endogenous beliefs. Most of the applications of this theoretical framework assume that the psychological utility functions representing such preferences are common knowledge. But this is often unrealistic. In particular, it cannot be true in experimental games where players are subjects drawn at random from a population. Therefore an incomplete-information methodology is called for. We take a first step in this direction, focusing on models of guilt aversion in the Trust Game. We consider two alternative modeling assumptions: (i) guilt aversion depends on the role played in the game, because only the "trustee" can feel guilt for letting the co-player down, (ii) guilt aversion is independent of the role played in the game. We show how the set of Bayesian equilibria changes as the upper bound on guilt sensitivity varies, and we compare this with the complete-information case. Our analysis illustrates the incomplete-information approach to psychological games and can help organize experimental results in the Trust Game. JEL classification: C72, C91, D03. Keywords: Psychological games, Trust Game, guilt, incomplete information. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:480&r=upt |
| By: | Yiyong Cai; Warwick J. McKibbin |
| Abstract: | This paper explores the failure of countries to coordinate climate policies as an equilibrium outcome of a game where countries optimize in the face of both unprecedented economic and environmental uncertainty. Because issues associated with climate change are historically unprecedented and thus policymakers do not have a prior distribution over possible outcomes, the usual theoretical framework based on governments maximizing expected utility may not be suitable for analyzing climate policy choice. Under an alternative plausible assumption that policymakers act strategically but choose the policy that incurs the highest possible gain in the worst-case scenario, this paper shows how coordination can be inferior to unilateralism in both carbon mitigation and economic loss minimization. In order to make progress in reaching a global agreement in this situation, additional restrictions that help to reduce uncertainty can lead to a coordinated outcome that benefits the environment and minimizes economic cost. |
| Keywords: | climate change, policy game, coordination, robust control |
| JEL: | C71 C72 Q52 Q54 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-13&r=upt |
| By: | James D. Hamilton; Jing Cynthia Wu |
| Abstract: | If commercial producers or financial investors use futures contracts to hedge against commodity price risk, the arbitrageurs who take the other side of the contracts may receive compensation for their assumption of nondiversifiable risk in the form of positive expected returns from their positions. We show that this interaction can produce an affine factor structure to commodity futures prices, and develop new algorithms for estimation of such models using unbalanced data sets in which the duration of observed contracts changes with each observation. We document significant changes in oil futures risk premia since 2005, with the compensation to the long position smaller on average in more recent data. This observation is consistent with the claim that index-fund investing has become more important relative to commerical hedging in determining the structure of crude oil futures risk premia over time. |
| JEL: | G13 G23 Q14 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19056&r=upt |
| By: | Gaurab Aryal |
| Abstract: | In this paper I estimate a model of competitive nonlinear pricing with multidimensional adverse selection. I model competition using a Stackelberg duopoly and solve the multidimensional screening problem by aggregating the multidimensional type into a single dimensional type. I study identification and estimation of the utility and cost parameters and the joint density of consumer types. The truncated marginal densities of the aggregated types can be nonparametrically identified but not the joint density. I use the classic Cramér-von Mises and Vuong’s test to select one parametric family of copula to estimate the joint density from the unspecified marginals. Using a unique data for advertisements collected from two Yellow Pages Directories in Central Pennsylvania I find that: (a) Joe copula characterizes the joint density of adverse selection; (b) there is a substantial heterogeneity among advertisers; (c) the estimated density rationalizes why there is more competition at the lower end of the ads than at the upper end; (d) consumers treat the ads as substitutes; and (e) a counterfactual exercise suggests that there is a substantial (3.8% of the sales) loss of welfare due to asymmetric information. |
| Keywords: | Competitive Nonlinear Pricing, Multidimensional Screening, Identification, Advertisement, Copula |
| JEL: | C14 D22 D82 L11 L13 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2013-610&r=upt |