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on Utility Models and Prospect Theory |
| By: | Alexia Gaudeul (Strategic Interaction Group, Max Planck Institute for Economics, Jena) |
| Abstract: | Willingness to take risk depends on whether the risk affects others as well as oneself and on how the risk affects one's position vis-`a-vis others. Taking a bet can improve one's position relative to others or threaten it. We present an experiment that explores individual attitudes to lotteries that involve both oneself and another subject. Individuals consistently and strongly dislike obtaining safe but unfair social outcomes rather than playing fair but risky social lotteries. This effect is apparent whether the unfair safe social outcome benefits them or the other. Subjects are also more risk averse when facing social lotteries than when facing lotteries that involve only themselves. There is a small but consistent and significant tendency to avoid social lotteries that impose a risk on the other. An attempt to reconcile those findings with standard models of social preferences shows that a high weight given to considerations of ex-ante inequality goes some way towards explaining the decisions of our subjects. It remains difficult however to account for the magnitude of their aversion to safe but unequal social outcomes. |
| Keywords: | Social preferences, Risk attitudes, Inequality aversion, Altruism, Procedural fairness, Utility measurement |
| JEL: | C91 D63 D81 |
| Date: | 2013–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2013-024&r=upt |
| By: | Pataracchia, B. (Tilburg University) |
| Abstract: | The financial crisis has warned modelers and policy makers about the inadequacy of existing macroeconomic models in explaining financial facts and in supporting the analysis of policies’ impact. This thesis assesses the contribution of assuming heterogeneity among investors and deviation from the rational expectations framework in order to explain the complex interlinkages between macroeconomic aggregates and financial risk. Chapter 2 provides an empirical analysis of a representative-investor consumption based asset pricing model with recursive ambiguity adverse preferences. Chapter 3 assesses the theoretical implications of ambiguity averse preference in the presence of time-varying perceived risk. Finally, the last chapter presents an asset pricing model with heterogeneous ambiguity attitudes showing that their interaction is able to reproduce the waves of optimism and pessimism observed in the asset prices series. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-5905989&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. |
| Keywords: | Psychological games, Trust Game, guilt, incomplete information |
| JEL: | C72 C91 D03 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:246&r=upt |
| By: | Ivan Shaliastovich (University of Pennsylvania); Ravi Bansal (Duke University) |
| Abstract: | In the data, we show that bond risk premia increase at times of high uncertainty about expected inflation and decrease with high uncertainty about expected growth; the magnitude of bond return predictability by these two uncertainty measures is similar to that found based on multiple yield factors. Motivated by this evidence, we provide an equilibrium long-run risks model which features time-varying volatilities of expected growth and expected inflation, and non-neutral inflation effect on future growth. We estimate the model and show that it can (i) successfully match the observed bond yield and macroeconomic data, (ii) account for bond return predictability evidence based on real and inflation uncertainties as well as the yield-based projections, and (iii) simultaneously explain for violations of the uncovered interest parity in currency markets. In the model, as in the data, bond risk premia are high in periods of high inflation uncertainty (e.g., 1980s), and are low and even negative in periods of high real uncertainty (e.g., mid-2000). We show that preference for early resolution of uncertainty, time-varying volatilities, and a non-neutral effect of inflation on growth are important to account for these aspects of bond markets. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:778&r=upt |
| By: | Bogdan Iftimie (IMAR); Monique Jeanblanc (DP); Thomas Lim (ENSIIE); Hai-Nam Nguyen |
| Abstract: | In this paper, we study the classical problem of maximization of the sum of the utility of the terminal wealth and the utility of the consumption, in a case where a sudden jump in the risk-free interest rate creates incompleteness. The value function of the dual problem is proved to be solution of a BSDE and the duality between the primal and the dual value functions is exploited to study the BSDE associated to the primal problem. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1305.7309&r=upt |
| By: | André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan); Karim Kilani (LIRSA, Conservatoire National des Arts et Métiers - Conservatoire National des Arts et Métiers (CNAM)); Gilbert Laffond (LIRSA-CRC - Laboratoire Interdisciplinaire de Recherche en Sciences de l'Action - Centre de recherche en comptabilité - Conservatoire National des Arts et Métiers (CNAM) : EA4603) |
| Abstract: | We show that the number of individuals selecting their worst alternatives within a finite set of alternatives can be written as an alternating sum of the number of individuals having their best choice within subset of alternatives. The identities are then applied to random utility models, including the multinomial logit model, the mixed logit model and the disaggregated version of the CES representative consumer model. Finally, we show that better estimates are obtained if respondents are asked to reveal their worst instead of their best choices. |
| Keywords: | Best-worst; CES; Discrete choice models; Gumbel distribution; Logit; Logsum |
| Date: | 2013–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00825656&r=upt |
| By: | Andreas Stathopoulos (University of Southern California); Andrea Vedolin (London School of Economics); Philippe Mueller (London School of Economics) |
| Abstract: | Foreign exchange correlation is a key driver of risk premia in the cross-section of carry trade returns. First, we show that the correlation risk premium, defined as the difference between the risk-neutral and objective measure correlation is large (15% per year) and highly time-varying. Second, sorting currencies according to their exposure with correlation innovations yields portfolios with attractive risk and return characteristics. We also find that high (low) interest rate currencies have negative (positive) loadings on the correlation risk factor. To address our empirical findings, we consider a multi-country general equilibrium model with time-varying risk aversion generated by external habit preferences. In the model, currency risk premia mostly compensate for exposure to global risk aversion, defined as a weighted average of country risk aversions. Given countercyclical real interest rates, the model can also address the forward premium puzzle, as high interest rate currencies are exposed to (while low interest rate currencies provide a hedge to) global risk aversion risk. We also show that high global risk aversion is associated with high conditional exchange rate variance and covariance, providing theoretical justification for sorting currencies on their exposure to fluctuations of exchange rate conditional second moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:818&r=upt |
| By: | Marc Willinger; Mohamed Ali Bchir; Carine Heitz |
| Abstract: | We study the evolution of preferences of villagers living under the threat of natural hazards in a volcanic area (Mount Mer- api, Central Java). Between December 2010 and April 2011, shortly after a major eruption, the villagers (perceived) expo- sure changed dramatically. We ran incentivized experiments at the beginning and after this period in order to elicit villagers' risk preferences and time preferences. Our three main ndings are as follows: (1) there exists a signi cant negative correlation between risk-tolerance and impatience (before and after): individuals who are more risk-tolerant are less impatient; (2) most respondents exhibit a change in their risk preference and/or time preference after having been exposed to a higher level of threat; (3) there ex- ists a signi cant negative correlation between the erosion of risk tolerance and the erosion of patience: individuals who became less (more) risk-tolerant also became more (less) impatient. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:13-08&r=upt |
| By: | Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Originally, behavioral law and economics was an exercise in exploring the implications of key findings from behavioral economics (and psychology) for the analysis and reform of legal institutions. Yet as the new discipline matures, it increasingly replaces foreign evidence by fresh evidence, directly targeted to the legal research question. This chapter surveys the key methods: field evidence, survey data, vignette and lab experiment, discusses their pros and cons, illustrates them with key publications, and concludes with methodological paths for fu-ture development. It quantifies statements with descriptive statistics about the 77 behavioral papers that have been published in the Journal of Empirical Legal Studies since its foundation until the end of 2012. |
| Keywords: | behavioral law and economics, law and psychology, criminology, field data, survey data, vignette, lab experiment |
| JEL: | K00 D02 C91 D03 C01 C83 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2013_01&r=upt |
| By: | Pavol Povala (University of Lugano); Anna Cieslak (Northwestern University) |
| Abstract: | We decompose yields into long-horizon expected inflation and maturity-related cycles to study the predictability of bond excess returns. Cycles capture the risk premium and the business cycle variation of short rate expectations. From cycles, we construct a forecasting factor that explains up to above 50% (30%) of in-sample (out-of-sample) variation of annual bond returns. The factor varies at a frequency higher than the business cycle, and predicts real activity at long horizons. It also aggregates information from different macro-finance predictors of bond returns. Our decomposition reveals why bond returns are predictable by a linear combination of forward rates or the term spread. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:771&r=upt |