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on Utility Models and Prospect Theory |
| By: | Anat Bracha (Federal Reserve Bank of Boston); Donald J. Brown (Dept. of Economics, Yale University) |
| Abstract: | The equilibrium prices in asset markets, as stated by Keynes (1930): "...will be fixed at the point at which the sales of the bears and the purchases of the bulls are balanced." We propose a descriptive theory of finance explicating Keynes' claim that the prices of assets today equilibrate the optimism and pessimism of bulls and bears regarding the payoffs of assets tomorrow. This equilibration of optimistic and pessimistic beliefs of investors is a consequence of investors maximizing Keynesian utilities subject to budget constraints defined by market prices and investor's income. The set of Keynesian utilities is a new class of non-expected utility functions representing the preferences of investors for optimism or pessimism, defined as the composition of the investor's preferences for risk and her preferences for ambiguity. Bulls and bears are defined respectively as optimistic and pessimistic investors. (Ir)rational exuberance is an intrinsic property of asset markets where bulls and bears are endowed with Keynesian utilities. |
| Keywords: | Keynes, Bulls and bears, Expectations, Asset markets |
| JEL: | D81 G11 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1898&r=upt |
| By: | Elabed, Ghada; Carter, Michael R. |
| Abstract: | We present a novel way to understand the low uptake of index insurance using the interlinked concepts of ambiguity and compound-lottery aversion. Noting that the presence of basis risk makes index insurance a compound lottery, we derive an expression of the willingness to pay (WTP) to eliminate basis risk. Empirically, we implement this WTP measure using framed eld experiments with cotton farmers in Southern Mali. In this sample, 57% of the surveyed farmers reveal themselves to be compound-risk averse to varying degrees. Using the distributions of compound-risk aversion and risk aversion in this population, we simulate the impact of basis risk on the demand for an index insurance contract. Compound-risk aversion decreases the demand for index insurance relative to what it would be if individuals had the same degree of risk aversion but were compound-risk neutral. In addition, demand declines more steeply as basis risk increases under compound-risk aversion than it does under risk neutrality. Our results highlight the importance of designing contracts with minimal basis risk if potential buyers are compound-risk averse. |
| Keywords: | Index Insurance, Risk and Uncertainty, Compound Risk, Ambiguity, Field Experiments, International Relations/Trade, Research Methods/ Statistical Methods, Risk and Uncertainty, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:150353&r=upt |
| By: | Chiu, Leslie J. Verteramo |
| Keywords: | Community/Rural/Urban Development, International Relations/Trade, Research Methods/ Statistical Methods, Risk and Uncertainty, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:150589&r=upt |
| By: | Duquette, Eric; Higgins, Nathaniel; Horowitz, John |
| Abstract: | We elicit time-discounting behavior from U.S. farmers that are broadly known to be either late or early adopters of farming best management practices. Using a single-choice experiment, we estimate the mean discount rate for each farmer group and find that late adopters have a mean discount rate that is thirteen percentage points higher than the mean rate of early adopters. We argue through simulations that this difference is likely due to differences in time preference rather than risk aversion. |
| Keywords: | Time preference, discount rates, experimental economics, technology adoption, risk preference, Demand and Price Analysis, Farm Management, Research and Development/Tech Change/Emerging Technologies, Risk and Uncertainty, C93, D01, D03, D81, Q18, Q52, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:150719&r=upt |
| By: | Sule Alan (Institute for Fiscal Studies and University of Cambridge); Nazli Baydar; Teodora Boneva; Thomas Crossley (Institute for Fiscal Studies and University of Essex); Seda Ertac |
| Abstract: | We study the transmission of risk attititudes in a unique survey of mothers and children in which both participated in an incentivised risk preference elicitation task. We document that risk preferences are correlated between mothers and children when the children are just 7 to 8 years old. This correlation is only present for daughters. We show that a measure of parental involvement is a strong moderator of the association between mothers' and daughers' risk tolerance. These findings support a role for socialisation in the intergenerational transmission of preferences that predict economic behaviour. |
| Keywords: | risk preferences, intergenerational transmission, children's economic decisions, field experiements |
| JEL: | C93 J16 D03 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:13/12&r=upt |
| By: | Cash, Sean B.; Slade, Peter; Craneld, John |
| Abstract: | We investigate whether consumer preferences for food products embodying multiple cre- dence attributes are easily satiated. Results from two treatments of an experiment suggest choices are not aected by the order in which attributes are presented. Initial evidence suggests diminishing marginal utility in the number of attributes included in food products embodying multiple credence attributes. However, further testing reveals that preferences are consistent with constant marginal utility in the number of product attributes, suggesting that preferences are not easily satiated. |
| Keywords: | Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Livestock Production/Industries, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:150364&r=upt |
| By: | Max Groneck; Alexander Ludwig; Alexander Zimper |
| Abstract: | On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold longer on to their assets than their rational expectations counterparts who correctly assess survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior. |
| JEL: | D91 D83 E21 |
| Date: | 2013–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0063&r=upt |
| By: | Shimokawa, Satoru |
| Abstract: | We develop a new framework to analyze the effect of calorie posting on overconsumption of calories in a fixed-price context (e.g., fixed-price buffets). The framework demonstrates that a desire to get `a good deal’ (transaction utility) and loss aversion can induce asymmetry between two conflicting learning effects of calorie posing: a calorie-decreasing effect of learning that one was underestimating calorie contents (LUE effect) and a calorie-increasing effect of learning that one was overestimating calorie contents (LOE effect). Our laboratory snack choice experiments confirm that the LUE effect dominates the LOE effect under the context of overconsumption, which is consistent with transaction utility theory rather than loss aversion. The findings demonstrate the potential of calorie posting to mitigate overeating. |
| Keywords: | Calorie posting, Calorie consumption, Learning, Transaction utility, Loss aversion, Laboratory Experiment, Agricultural and Food Policy, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Health Economics and Policy, D81, D91, I12, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:149687&r=upt |
| By: | Victor de Miguel; Alberto Martín Utrera; Francisco J. Nogales |
| Abstract: | We study the impact of parameter uncertainty in multiperiod portfolio selection with trading costs. We analytically characterize the expected loss of a multiperiod investor, and we find that it is equal to the product of two terms. The first term corresponds with the single-period utility loss in the absence of transaction costs, as characterized by Kan and Zhou (2007), whereas the second term captures the multiperiod effects on the overall utility loss. To mitigate the impact of parameter uncertainty, we propose two multiperiod shrinkage portfolios. The first multiperiod shrinkage portfolio combines the Markowitz portfolio with a target portfolio. This method diversifies the effects of parameter uncertainty and reduces the risk of taking inefficient positions. The second multiperiod portfolio shrinks the investor's trading rate. This novel technique smooths the investor trading activity and it also may help to considerably reduce the impact of parameter uncertainty. Finally, we test the out-of-sample performance of our considered portfolio strategies with simulated and empirical datasets, and we find that ignoring transaction costs, parameter uncertainty, or both, results into large losses in the investor's performance |
| Keywords: | Estimation error, Shrinkage portfolios, Trading costs, Out-of-sample performance |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws132119&r=upt |
| By: | Jérôme Massiani (Department of Economics, University of Venice Cà Foscari) |
| Abstract: | Stated Preferences are, together with Bass diffusion and, to a lesser extent, Total Cost of Ownership, the most popular methods to forecast the future diffusion of electric and alternative fuel vehicles. In this contribution, we compare the merits and limitations of SP relative to other methods. We also review the empirical results provided by SP surveys and assess their validity for modeling market diffusion. We also propose a meta-analysis-based Synthetic Utility Function that consolidates results across various studies and can be used, for simulation purpose, in a Discrete Choice Model context. Such an approach makes the simulation results less dependent of single surveys’ idiosyncrasies, and hence is helpful for the formulation of robust policy recommendations. |
| Keywords: | Stated Preferences, Alternative fuel vehicle, market diffusion |
| JEL: | C53 O33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2013:12&r=upt |
| By: | Brent, Daniel A.; Cook, Joseph H.; Olsen, Skylar |
| Abstract: | Utilizing social norms is gaining momentum as a cost-eective mechanism to pro- mote sustainable behavior. We analyze household water data from multiple pilot programs for a company that provides information campaigns containing social comparisons of water use and per- sonalized conservation recommendations in order to reduce household water consumption. We nd signicant treatment eect heterogeneity across the distribution of consumption and environmental attitudes. In the two pilots with a full year of data one utility achieves savings of 6.5%; while the other in aggregate achieved limited conservation gains. Heterogeneity based on the distribution of consumption is more important in the utility with signicant savings, with the highest users saving the most water. In contrast ideology appears to be more important in the utility with an insignif- icant average treatment eect with dis-savings for those with very low environmental preferences and strong savings for the most environmentally-conscious. Inter-regional ideology may play an critical role since the utility with signicant savings is in a much "greener" community, whereas intra-utility ideology is in uential in conservative areas. We caution interpretation of the results, particularly for Utility B, as the data are still incomplete. |
| Keywords: | Water demand, Social norms, Behavioral economics, Water conservation, Consumer/Household Economics, Public Economics, Q21, Q25, Q54, |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:149697&r=upt |
| By: | Antonio Miralles |
| Abstract: | We study random assignment economies with expected-utility agents, each of them eventually obtaining a single object. Inspired on Hylland and Zeckhauser’s (1979) Pseudomarket mechanism (PM) and on a serial dictatorship, we introduce the Sequential Pseudomarket (SP) where groups of agents are called turn by turn and participate in a pseudomarket for the remaining objects. To measure efficiency, we focus on the set of ex-ante Pareto-optimal (PO) random assignments and on the ex-ante weak core (CO). We find: 1) PM ⊂ PO but the converse is not always true (there is no Second Theorem of Welfare Economics), 2) PO ⊂ SP but the converse is not always true, 3) SP ⊂ CO |
| Keywords: | random assignment, ex-ante efficiency, weak core, sequential pseudomarket |
| JEL: | D50 D60 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:699&r=upt |
| By: | Ingmar Schumacher |
| Abstract: | We develop an overlapping generations model with environmental quality and endogenous environmental culture. Based upon empirical evidence, preferences over culturally-weighted consumption and environmental quality are assumed to follow a Leontieff function. We find that four different regimes may be possible, with interior or corner solutions in investments in environmental culture and maintenance. Depending on the parameter conditions, there exists one of two possible, asymptotically stable steady states, one with and one without investments in environmental culture. For low wealth levels, society is unable to free resources for environmental culture. In this case, society will only invest in environmental maintenance if environmental quality is sufficiently low. Once society has reached a certain level of economic development, then it may optimally invest a part of its wealth in developing an environmental culture. Environmental culture has not only a positive impact on environmental quality through lower levels of consumption, but it improves the environment through maintenance expenditure for wealth-environment combinations at which, in a restricted model without environmental culture, no maintenance would be undertaken. Environmental culture leads to a society with a higher indirect utility at steady state in comparison to the restricted model. Our model leads us to the conclusion that, by raising the importance of environmental quality for utility, environmental culture leads to lower steady state levels of consumption and wealth, but higher environmental quality. Thus, for societies trapped in a situation with low environmental quality, investments in culture may induce positive feedback loops, where more culture raises environmental quality which in turn raises environmental culture. We also discuss how environmental culture may lead to an Environmental Kuznets Curve. |
| Keywords: | environmental culture; overlapping generations model; environment; endogenous preferences. |
| JEL: | Q56 D90 |
| Date: | 2013–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:13&r=upt |
| By: | Liu, Jing; Shively, Gerald; Binkley, James |
| Abstract: | In the canonical consumer demand problem, an agent makes a decision about quantities to consume, under the assumption that all possible varieties are available and can be accessed at zero cost. Quantities of each budget item are adjusted to achieve maximum utility subject to the budget constraint. As a result, utility and expenditure reflect aggregations of quantity and, implicitly, variety. In reality, the cost of accessing variety may not be zero. In this paper we study the consumer’s choice problem using an endogenous variety approach, allowing variety access cost to influence consumption. We develop a conceptual framework for the problem and test its predictions empirically by comparing patterns of dietary diversity over time among a large sample of urban and rural Chinese consumers. We find that access costs, reflecting differences in infrastructure and household storage technologies, influence dietary diversity. |
| Keywords: | dietary diversity, rural-urban difference, variety access cost, Agricultural and Food Policy, Community/Rural/Urban Development, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, D12, D13, I10, Q18, R22, |
| Date: | 2013–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:149624&r=upt |
| By: | A. Mantovi |
| Abstract: | A 2-parameter class of ordinal utility functions over a pair of goods is discussed with respect to general traits of preferences for luxury. The class contains Cobb-Douglas functions as no-luxury limit; its analytical tractability is probed by simple closed form solutions for Marshallian demand functions, expansion paths, Engel curves, income elasticity of demand, saturation levels, elasticity of substitution. Following Mantovi (2013), scale and substitution effects can be represented in terms of flows on bundle space; departure from homotheticity can thereby be represented by an index of luxury which measures the noncommutativity of such effects. On conceptual grounds, our index is intimately connected with Shephard’s distance. Decompositions of productive efficiency as tailored by Bogetoft et al. (2006) represent a natural setting for the application of our approach. |
| Keywords: | Duality, homotheticity, Cobb-Douglas function, luxury, expansion path, elasticity of substitution, scale effect, substitution effect, income effect, Shephard’s distance |
| JEL: | D11 D81 E21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:par:dipeco:2013-ep02&r=upt |
| By: | Melstrom, Richard T.; Lupi, Frank |
| Abstract: | This paper proposes using a control function to correct for endogeneity in recreation demand models. The control function approach is contrasted with the method of alternative specific constants (ASCs), which has been promoted in prior research. As an application, we consider the case of travel cost endogeneity in the demand for Great Lakes recreational fishing. Using data on Michigan anglers, we employ a random utility model of site choice. We show that either ASCs or the control function will correct for travel cost endogeneity, although we find that the model with ASCs produces significantly weaker results. Overall, compared with traditional approaches control functions may offer a more flexible means to eliminate endogeneity in recreation demand models. |
| Keywords: | Recreation demand, random utility model, travel cost method, travel cost endogeneity, control function, alternative specific constants, recreational fishing, Environmental Economics and Policy, Research Methods/ Statistical Methods, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:149732&r=upt |
| By: | Gaetano Antinolfi (Washington University) |
| Abstract: | We study dynamic contracts between a lender and a borrower in the presence of costly state verification and hidden effort. The optimal contract minimizes social losses by mediating dynamic incentives and monitoring. Along the efficiency frontier, the threat of early termination is unavoidable for low levels of the borrower's promised utility; as the level increases, preventive monitoring is used to avoid future inefficient termination of the contractual relationship due to asymmetric information; for high level of promised utility, the threat of termination of the contractual relationship is no longer a useful tool to align dynamic incentives, preventive monitoring loses its role, and termination never occurs. Thus, the efficient contract optimizes the tradeoff between dynamic incentives and static incentives. Following the interpretation of the costly state verification literature, we can distinguish two levels of bankruptcy: one that leads to monitoring and the other that leads to liquidation. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:892&r=upt |
| By: | Daron Acemoglu; Georgy Egorov; Konstantin Sonin |
| Abstract: | We provide a general framework for the analysis of the dynamics of institutional change (e.g., democratization, extension of political rights or repression of different groups), and how these dynamics interact with (anticipated and unanticipated) changes in the distribution of political power and in economic structure. We focus on the Markov Voting Equilibria, which require that economic and political changes should take place if there exists a subset of players with the power to implement such changes and who will obtain higher expected discounted utility by doing so. Assuming that economic and political institutions as well as individual types can be ordered, and preferences and the distribution of political power satisfy natural “single crossing” (increasing differences) conditions, we prove the existence of a pure-strategy equilibrium, provide conditions for its uniqueness, and present a number of comparative static results that apply at this level of generality. We then use this framework to study the dynamics of political rights and repression in the presence of radical groups that can stochastically grab power. We characterize the conditions under which the presence of radicals leads to repression (of less radical groups), show a type of path dependence in politics resulting from radicals coming to power, and identify a novel strategic complementarity in repression. |
| JEL: | C71 D71 D74 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19158&r=upt |
| By: | Ellison, Brenna; Lusk, Jayson |
| Abstract: | Current research has focused on whether nutrition labeling and pricing policies (i.e., soda taxes) influence food decisions; however, less attention has been given to how peers influence one’s food decisions. This study uses sales receipts from a full-service restaurant to take a closer look at how people order in groups. Results of the study revealed people may be less variety-seeking than previous research suggests; in fact, diners were more likely to seek variety when choosing an individual item, but not when choosing a menu category. In other words, diners wanted to be different from their dining companions, but not too different. This result was further confirmed with a model of food choice which shows diners derived more utility from an entrée when a fellow diner ordered an entrée in the same category. Interestingly, the presence of calorie labels on menus did not change the marginal utility of calories, suggesting peer effects may outweigh the effects of nutritional information. |
| Keywords: | food decisions, group ordering behavior, variety-seeking vs. conformism, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Institutional and Behavioral Economics, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea13:150266&r=upt |