
on Utility Models and Prospect Theory 
By:  Todd Sarver 
Abstract:  This paper considers a model of referencedependent utility in which the individual makes a conscious choice of her reference point for future consumption. The model incorporates the combination of loss aversion and anticipatory utility as competing forces in the determination of the optimal reference point: anticipating better outcomes boosts current utility but also raises the reference level for future consumption, making the individual more susceptible to losses. A central focus of the paper is on the implications of this model of Optimal Anticipation for attitudes toward risk in dynamic environments. The main representation is formulated in an infinitehorizon framework, and axiomatic foundations are provided. I also describe special cases and show in particular that recursive expected utility in the sense of Epstein and Zin (1989) and Kreps and Porteus (1978) can be reinterpreted in terms of optimal anticipation and loss aversion. Finally, I describe a homogeneous version of the model and apply it to a portfolio choice problem. I show that asset pricing for the Optimal Anticipation model is based on simple modifications of standard Euler equations. While maintaining tractability, this model is rich enough to permit firstorder risk aversion and can overcome several deficits of standard expected utility, such as the equity premium puzzle and Rabin's paradox. JEL Classification: D03, D81, G12 
Keywords:  reference dependence, loss aversion, anticipatory utility, equity premium puzzle, Rabin paradox 
Date:  2012–06–18 
URL:  http://d.repec.org/n?u=RePEc:nwu:cmsems:1566&r=upt 
By:  Haluk Ergin; Todd Sarver 
Abstract:  We study preferences for timing of resolution of objective uncertainty in a menuchoice model with two stages of information arrival. We characterize a general class of utility representations called hidden action representations, which interpret an intrinsic preference for timing of resolution of uncertainty as if an unobservable action is taken between the resolution of the two periods of information arrival. These representations permit a richer class of preferences for timing than was possible in the model of Kreps and Porteus (1978) by incorporating a preference for flexibility. Our model contains several special cases where this hidden action can be given a novel economic interpretation, including a subjectivestatespace model of ambiguity aversion and a model of costly contemplation. 
Keywords:  temporal preferences, preference for flexibility, hidden action, subjective uncertainty 
Date:  2012–09–14 
URL:  http://d.repec.org/n?u=RePEc:nwu:cmsems:1567&r=upt 
By:  Pierpaolo Battigalli; Simone CerreiaVioglio; Fabio Maccheroni; Massimo Marinacci 
Abstract:  In a decision problem under uncertainty, a decision maker considers a set of alternative actions whose consequences depend on uncertain factors outside his control. Following Luce and Raiffa (1957), we adopt a natural representation of such situation that takes as primitives a set of conceivable actions A, a set of states S and a consequence function from actions and states to consequences in C. With this, each action induces a map from states to consequences, or Savage act, and each mixed action induces a map from states to probability distributions over consequences, or AnscombeAumann act. Under a consequentialist axiom, preferences over pure or mixed actions yield corresponding preferences over the induced acts. The most common approach to the theory of choice under uncertainty takes instead as primitive a preference relation over the set of all AnscombeAumann acts (functions from states to distributions over consequences). This allows to apply powerful convex analysis techniques, as in the seminal work of Schmeidler (1989) and the vast descending literature. This paper shows that we can maintain the mathematical convenience of the AnscombeAumann framework within a description of decision problems which is closer to applications and experiments. We argue that our framework is more expressive, it allows to be explicit and parsimonious about the assumed richness of the set of conceivable actions, and to directly capture preference for randomization as an expression of uncertainty aversion. 
Date:  2013 
URL:  http://d.repec.org/n?u=RePEc:igi:igierp:485&r=upt 
By:  Ivanov, Sergei 
Abstract:  Maximization of result from operations with securities is not always ultimate goal of participants. For example, result can be exchanged into different currencies. There can be different utility functions that transform result into some asset. Different riskneutral probability densities could be derived from one set of option prices by participants using different utility functions. Integral of derived density function must be equal to one. There have to be no such utility function for which this condition is not met. Otherwise, derived function is not a probability density. This allows using of riskfree profitable arbitrage strategies. However it was shown that such utility function almost always exist. It is hard to use on nowadays markets. By this reason such opportunity was called “weak arbitrage”. 
Keywords:  market efficiency, probability density, interest rate, arbitrage, efficiency conditions 
JEL:  G10 G12 
Date:  2013–06–20 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:47723&r=upt 
By:  MuellerLanger, Frank; AndreoliVersbach, Patrick 
Abstract:  Two 'order effects' may emerge in dynamic tournaments with information feedback. First, participants adjust effort across stages, which could advantage the leading participant who faces a larger 'effective prize' after an initial victory (leadingeffect). Second, participants lagging behind may increase risk at the final stage as they have 'nothing to lose' (risktaking). We use a randomized natural experiment in professional twogame soccer tournaments where the treatment (order of a stagespecific advantage) and team characteristics, e.g. ability, are independent. We develop an identification strategy to test for leadingeffects controlling for risktaking. We find no evidence of leadingeffects and negligible risktaking effects. 
Keywords:  Tournaments; order effects; leadingeffect; risktaking; randomized natural experiments 
JEL:  C93 C21 D01 L83 
Date:  2013–06–17 
URL:  http://d.repec.org/n?u=RePEc:lmu:muenec:15452&r=upt 