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on Utility Models and Prospect Theory |
| By: | David Dillenberger (University of Pennsylvania); Uzi Segal (Boston College) |
| Abstract: | Experimental evidence suggests that individuals who face an asymmetric distribution over the likelihood of a specific event might actually prefer not to know the exact value of this probability. We address these findings by studying a decision maker who has recursive, non-expected utility preferences over two-stage lotteries. For a binary lottery that yields the better outcome with probability p, we identify noise around p with a compound lottery that induces a probability distribution over the exact value of the probability and has an average value p. We first propose and characterize a new notion of skewed distributions. We then use this result to provide conditions under which a decision maker who always rejects symmetric noise around p will always reject skewed to the left noise, but might accept skewed to the right noise. The model can be applied to the areas of investment under risk, medical decision making, and criminal law procedures, and can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty. |
| Keywords: | Asymmetric noise, skewed distributions, recursive non-expected utility, ambiguity seeking, compound lotteries |
| JEL: | D81 |
| Date: | 2013–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:843&r=upt |
| By: | Gollier, Christian; Hammitt, James; Treich, Nicolas |
| Abstract: | As in any research field, risk theory has its important questions, results, and paradoxes, as well as its seminal papers and key authors. Louis Eeckhoudt has been a key author in the field of risk theory. To celebrate his many contributions and continue the development of theories of decision making under risk, the Toulouse School of Economics hosted “Risk and choice: A conference in honor of Louis Eeckhoudt” July 12- 13, 2012. This paper presents some of Eeckhoudt’s main contributions to the literature, and provides some illustrations of the remarkable research saga in risk theory over the last 50 years since Pratt’s (1964) characterization of risk aversion under expected utility. |
| Keywords: | Risk aversion, prudence, risk, self-protection, insurance, portfolio choice, expected utility. |
| JEL: | D81 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27728&r=upt |
| By: | Sigrid K\"allblad |
| Abstract: | Motivated by recent axiomatic developments, we study the risk- and ambiguity-averse investment problem where trading takes place over a fixed finite horizon and terminal payoffs are evaluated according to a criterion defined in terms of a quasiconcave utility functional. We extend to the present setting certain existence and duality results established for the so-called variational preferences by Schied (2007). The results are proven by building on existing results for the classical utility maximization problem. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1311.7419&r=upt |
| By: | Piolatto, Amedeo (Barcelona Institute of Economics); Rablen, Matthew D. (Brunel University) |
| Abstract: | The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in respect of the puzzle. Prospect theory fails to reverse the puzzle for various classes of endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude. |
| Keywords: | prospect theory, tax evasion, Yitzhaki puzzle, stigma, diminishing sensitivity, reference dependence, endogenous audit probability, endogenous reference level |
| JEL: | H26 D81 K42 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7760&r=upt |
| By: | Ilya Zutler (National Research University Higher School of Economics. Faculty of Economics, Department of Higher Mathematics, Docent, PhD) |
| Abstract: | A number of experiments indicate probabilistic preferences in cases where no one alternative is absolutely optimal. The task of predicting the choice of one of the alternatives among multiple alternatives is then practically important and not trivial. It can occur in situations of choice under risk when no one lottery stochastically dominates others. For risky lotteries there are several complicated models of probabilistic binary preference. For the first time, we herein propose the probabilistic extension of the cumulative prospect theory (CPT). The presented visual graphic justification of this model is intuitively clear and does not use sophisticated cumulative summing or a Choquet integral. Here we propose a model of selecting from a set of alternatives by continuous Markov random walks. It makes predicting the results of a choice easy because it fully uses dates received by probabilistic extension of ÑPT. The proposed methods are quite simple and do not require a large amount of data for practical use |
| Keywords: | cumulative prospect theory, probabilistic choice, continues Markov process. |
| JEL: | D81 D83 C44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:33/ec/2013&r=upt |
| By: | OMORI Mika |
| Abstract: | Psychosocial stress has received attention from scholars and practitioners as a mental health issue within a variety of domains ranging from school to industrial settings. Extreme or chronic psychological distress results in not only psychological problems such as depression but also physical illnesses mediating health risk behaviors. Evidence-based preventive strategies must be developed to promote stress reduction programs. The present paper primarily sought to discuss new directions of self-help for psychological stress. In order to accomplish this, the paper first overviewed traditional psychotherapies and argues the potential problems. Next, expressive writing proposed by Pennebaker et al. (1986) as a self-help method was introduced. The effectiveness of expressive writing within the context of college transition was empirically tested by an experimental design with 24 female college freshmen. The participants were randomly assigned to one of three experimental groups: expressive writing, controlled writing, and non-writing control groups. Individuals assigned to either expressive writing or controlled writing groups were asked to engage in writing tasks for 20 minutes for three consecutive days. Changes in positive emotions increased after the completion of the writing sessions, however, those changes were not statistically significant. No statistically significant changes were observed for three outcome variables including depression, anxiety, and anger. Implications for future studies were discussed. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:13076&r=upt |
| By: | Osberghaus, Daniel |
| Abstract: | Climate change is one of the most pressing challenges in current environmental policy. Appropriate policies intended to stimulate efficient adaptation and mitigation should not exclusively rely on the assumption of the homo oeconomicus, but take advantage of well-researched alternative behavioural patterns. Prospect theory provides a number of climate-relevant insights, such as the notion that evaluations of outcomes are reference dependent, and the relevance of perceived certainty of outcomes. This paper systematically reviews what prospect theory can offer to analyse mitigation and adaptation. It is shown that accounting for reference dependence and certainty effects contributes to a better understanding of some well-known puzzles in the climate debate, including (but not limited to) the different uptake of mitigation and adaptation amongst individuals and nations, the role of technical vs. financial adaptation, and the apparent preference for hard protection measures in coastal adaptation. Finally, concrete possibilities for empirical research on these effects are proposed. -- |
| Keywords: | Adaptation,Climate Change,Mitigation,Prospect Theory,Reference Point,Uncertainty |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13091&r=upt |
| By: | Xiaonan Liu; Jeffrey T. LaFrance; Hayley H. Chouinard; Thomas L. Marsh |
| Abstract: | We propose a Generalized Quadratic Utility (GQU) model for an incomplete demand system with binding non-negativity constraints which is flexible in income and price effects. The model accounts for zero consumption using choke prices identified by Kuhn-Tucker conditions. The GQU demand system can overcome the analytical and computational difficulties of the Kuhn-Tucker approach. Applying a homothetic AIDS specification, we estimate the demand for ale and lager beers and find that household income, age, presence of child, and prices play significant roles in beer consumption. The own-price elasticities are greater than unity. The cross-price elasticities suggest substitutes between ales and lagers. |
| JEL: | D11 D12 C31 L66 |
| Date: | 2013–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2013:pli830&r=upt |
| By: | Syed Adeel Hussain |
| Abstract: | This technical paper highlights the substantive and notable Market Risk difference among Islamic and Conventional Securities with respect to their Actual Price Volatility Risk Characteristics in context of Listed Pakistani Capital Markets. The data analyzes market risk of each listed security based on price series of the last five years drawn from the KSE 100 Index. We have used KMI 30 Index within KSE 100 Index to separate Islamic Stocks from their conventional counterparts. The study has applied two different market risk measurement methods of VaR - Value at Risk calculation such as Historical Simulation and VCV â Variance Covariance. In this paper three different confidence intervals are applied distinctly but simultaneously to both methods of VaR Calculation and groups of stocks ie (Islamic/Sharia Compliant and Conventional Equities). At the end, Percentiles are used to classify VaR measurements belonging to each group of stock. The Null Hypothesis is tested using a difference between means of two populationsâ z test statistic model at given 5% level of significance. The intention of writing this paper was to technically âfill the literature gapâ which exists within the purview of literature review covering both areas in Risk Finance and Islamic Finance. |
| JEL: | G1 |
| Date: | 2013–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2013:phu395&r=upt |