nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒08‒23
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The role of emotions on risk aversion: a prospect theory experiment By Raymundo M. Campos-Vazquez; Emilio Cuilty
  2. Intertemporal stability of ambiguity preferences By Duersch, Peter; Römer, Daniel; Roth, Benjamin
  3. Multi-asset risk measures By Walter Farkas; Pablo Koch-Medina; Cosimo-Andrea Munari
  4. A pricing measure to explain the risk premium in power markets By Fred Espen Benth; Salvador Ortiz-Latorre

  1. By: Raymundo M. Campos-Vazquez (El Colegio de Mexico); Emilio Cuilty (El Colegio de Mexico)
    Abstract: This study measures risk and loss aversion using Prospect Theory and the impact of emotions on those parameters. Our controlled experiment at two universities in Mexico City, using uncompensated students as research subjects, found results similar to those obtained by Tanaka et al. (2010). In order to study the role of emotions, we provided subjects with randomly varied information on rising deaths due to drug violence in Mexico and also on youth unemployment. In agreement with previous studies, we find that risk aversion on the gains domain decreases with age and income. We also find that loss aversion decreases with income and is less for students in public universities. With regard to emotions, risk aversion increases with sadness and loss aversion is negatively influenced by anger. On the loss domain, anger dominates sadness. On average, anger reduces loss aversion by half.
    Keywords: risk aversion; emotions; prospect theory; experiment; Mexico
    JEL: C93 D03 D12 O12 O54
    Date: 2013–03
  2. By: Duersch, Peter; Römer, Daniel; Roth, Benjamin
    Abstract: To make predictions with theories, usually we assume an individual's characteristics such as uncertainty preferences to be stable over time. In this paper, we analyze the stability of ambiguity preferences experimentally. We repeatedly elicit ambiguity attitudes towards multiple 3-color Ellsberg urns over a period of two months. In our data, 57% of the choices are consistent with stable preferences over the time of observation. This share is significantly higher than random choices would suggest, but significantly lower than the level of consistency in a control treatment without a time lag (71%). Interestingly, for subjects who are able to recall their decision after two months correctly, the share of consistent choices does not drop significantly over time.
    Keywords: ambiguity; stability of preferences; experiment
    Date: 2013–08–13
  3. By: Walter Farkas; Pablo Koch-Medina; Cosimo-Andrea Munari
    Abstract: We study risk measures for financial positions in a multi-asset setting, representing the minimum amount of capital to raise and invest in eligible portfolios of traded assets in order to meet a prescribed acceptability constraint. We investigate finiteness and continuity properties of these multi-asset risk measures, highlighting the interplay between the acceptance set and the class of eligible portfolios. We develop a new approach to dual representations of convex multi-asset risk measures which relies on a characterization of the structure of closed convex acceptance sets. To avoid degenerate cases we need to ensure the existence of extensions of the underlying pricing functional which belong to the effective domain of the support function of the chosen acceptance set. We provide a characterization of when such extensions exist. Finally, we discuss applications to conical market models and set-valued risk measures, optimal risk sharing, and superhedging with shortfall risk.
    Date: 2013–08
  4. By: Fred Espen Benth; Salvador Ortiz-Latorre
    Abstract: In electricity markets, it is sensible to use a two-factor model with mean reversion for spot prices. One of the factors is an Ornstein-Uhlenbeck (OU) process driven by a Brownian motion and accounts for the small variations. The other factor is an OU process driven by a pure jump L\'evy process and models the characteristic spikes observed in such markets. When it comes to pricing, a popular choice of pricing measure is given by the Esscher transform that preserves the probabilistic structure of the driving L\'evy processes, while changing the levels of mean reversion. Using this choice one can generate stochastic risk premiums (in geometric spot models) but with (deterministically) changing sign. In this paper we introduce a pricing change of measure, which is an extension of the Esscher transform. With this new change of measure we also can slow down the speed of mean reversion and generate stochastic risk premiums with stochastic non constant sign, even in arithmetic spot models. In particular, we can generate risk profiles with positive values in the short end of the forward curve and negative values in the long end. Finally, our pricing measure allows us to have a stationary spot dynamics while still having randomly fluctuating forward prices for contracts far from maturity.
    Date: 2013–08

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