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on Utility Models and Prospect Theory |
| By: | Frederik Schwerter |
| Abstract: | This study test whether social reference points impact individual risk taking. In a laboratory experiment, decision makers observe the earnings of a peer subject before making a risky choice. We exogenously manipulate the peer earnings across two treatments. We find a signicant treatment effect on risk taking: decision makers vary their risk taking in order to surpass or stay ahead of their peer. Our findings are consistens with a social-comparison-based, reference-dependent preference model that formalizes relative concerns via social loss aversion. Additionally, we relate our findings to the impact of private reference points on risk taking. |
| Keywords: | Social Comparisons, Social Loss Aversion, Reference-Dependent Preferences, Lab Experiments, Relative Income Concerns |
| JEL: | C91 D03 D81 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse11_2013&r=upt |
| By: | Rose-Anne Dana (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Franck Riedel (Center for mathematical economics - Universität Bielefeld (GERMANY)) |
| Abstract: | We study a dynamic and infinite-dimensional model with incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk-adjusted prior and subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agentsʼ multiple prior sets. A specific model with neither risk nor uncertainty at the aggregate level is considered. Risk is always fully insured. For small levels of ambiguity, there exists an equilibrium with inertia where agents also insure fully against Knightian uncertainty. When the level of ambiguity exceeds a critical threshold, full insurance no longer prevails and there exist equilibria with inertia where agents do not insure against uncertainty at all. We also show that equilibria with inertia are indeterminate. |
| Keywords: | Dynamic general equilibrium; No trade; General equilibrium theory; Incomplete preferences; Ambiguity; Knightian uncertaintyagainst uncertainty at all. . Dynamic general equilibrium; No trade; General equilibrium theory; Incomplete preferences; Ambiguity; Knightian uncertaintyagainst uncertainty at all. . Dynamic general equilibrium; No trade; General equilibrium theory; Incomplete preferences; Ambiguity; Knightian uncertaintyagainst uncertainty at all. . |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00927170&r=upt |
| By: | R.A Dana; C. Le Van |
| Abstract: | This article reconsiders the theory of existence of efficient allocations and equilibria when consumption sets are unbounded below under the assumption that agents have incomplete preferences. It is motivated by an example in the theory of assets with short-selling where there is risk and ambiguity. Agents have Bewley’s incomplete preferences. As an inertia principle is assumed in markets, equilibria are individually rational. It is shown that a necessary and sufficient for existence of an individually rational efficient allocation or of an equilibrium is that the relative interiors of the risk adjusted sets of probabilities intersect. The more risk averse, the more ambiguity averse the agents, the more likely is an equilibrium to exist. The paper then turns to incomplete preferences with concave multi-utility representations. Several definitions of efficiency and of equilibrium with inertia are considered. Sufficient conditions and necessary and sufficient conditions are given for existence of efficient allocations and equilibria with inertia. |
| Keywords: | Uncertainty, risk, risk adjusted prior, no arbitrage, equilibrium with short-selling, incomplete preferences, equilibrium with inertia. |
| JEL: | C62 D50 D81 D84 G1 |
| Date: | 2014–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:201420&r=upt |
| By: | Steven Kou; Xianhua Peng |
| Abstract: | This paper attempts to provide a decision theoretical foundation for the measurement of economic tail risk, which is not only closely related to utility theory but also relevant to statistical model uncertainty. The main result of the paper is that the only tail risk measure that satisfies both a set of economic axioms proposed by Schmeidler (1989, Econometrica) and the statistical property of elicitability (i.e. there exists an objective function such that minimizing the expected objective function yields the risk measure; see Gneiting, 2011, J. Amer. Stat. Assoc.) is median shortfall, which is the median of the tail loss distribution. As an application, we argue that median shortfall is a better alternative than expected shortfall as a risk measure for setting capital requirements in Basel Accords. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1401.4787&r=upt |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Clotilde Napp (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine); Diego Nocetti (CIMS - Courant Institute of Mathematical Science - New York University) |
| Abstract: | In this paper we extend the theory of precautionary saving to the case in which uncertainty is multidimensional and we develop a matrix-measure of multivariate prudence. Furthermore, we characterize comparative prudence, decreasing and increasing prudence, the effect of uncertainty on the marginal propensity to consume out of wealth, and the Drèze-Modigliani substitution effect in this multivariate setting. We also characterize the concept of multivariate downside risk aversion as a multivariate preference for harm disaggregation. We show that our definition is equivalent to a positive precautionary saving motive. We propose an alternative measure of the intensity of downside risk aversion and show that this measure is useful in understanding several economic problems that involve multivariate preferences. |
| Keywords: | matrix-measure, multivariate prudence, comparative prudence, multivariate downside risk aversion, downside risk aversion, multivariate preferences |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00635558&r=upt |
| By: | Dylan Possama\"i; Guillaume Royer |
| Abstract: | We study the utility indifference price of a European option in the context of small transaction costs. Considering the general setup allowing consumption and a general utility function at final time T, we obtain an asymptotic expansion of the utility indifference price as a function of the asymptotic expansions of the utility maximization problems with and without the European contingent claim. We use the tools developed in [51] and [45] based on homogenization and viscosity solutions to characterize these expansions. Finally we provide two examples, in particular recovering under weaker assumptions the results of [6]. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1401.3261&r=upt |
| By: | Elyès Jouini (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Clotilde Napp (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine); Diego Nocetti (Clarkson University - Clarkson University) |
| Abstract: | We study comparative statics of Nth-degree risk increases within a large class of problems that involve bidimensional payoffs and additive or multiplicative risks. We establish necessary and sufficient conditions for unambiguous impact of Nth-degree risk increases on optimal decision making. We develop a simple and intuitive approach to interpret these conditions : novel notions of directional Nth-degree risk aversion that are characterized via preferences over lotteries. |
| Keywords: | Comparative statics, Nth degree risk increases, Risk disaggregation |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00927270&r=upt |
| By: | Guillaume Carlier (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Rose-Anne Dana (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine) |
| Abstract: | An exchange economy in which agents have convex incomplete preferences defined by families of concave utility functions is considered. Sufficient conditions for the set of efficient allocations and equilibria to coincide with the set of efficient allocations and equilibria that result when each agent has a utility in her family are provided. Welfare theorems in an incomplete preferences framework therefore hold under these conditions and efficient allocations and equilibria are characterized by first order conditions. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00661903&r=upt |
| By: | Francoise Forges (LEDa - Laboratoire d'Economie de Dauphine - Université Paris IX - Paris Dauphine, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Vincent Iehlé (LEDa - Laboratoire d'Economie de Dauphine - Université Paris IX - Paris Dauphine, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine) |
| Abstract: | According to a minimalist version of Afriat's theorem, a consumer behaves as a utility maximizer if and only if a feasibility matrix associated with his choices is cyclically consistent. An essential experiment consists of observed consumption bundles (x_1,..., x_n) and a feasibility matrix \alpha. Starting with a standard experiment, in which the economist has access to precise budget sets, we show that the necessary and sufficient condition for the existence of a utility function rationalizing the experiment, namely, the cyclical consistency of the associated feasibility matrix, is equivalent to the existence, for any budget sets compatible with the deduced essential experiment, of a utility function rationalizing them (and typically depending on them). In other words, the conclusion of the standard rationalizability test, in which the economist takes budget sets for granted, does not depend on the full specification of the underlying budget sets but only on the essential data that these budget sets generate. Starting with an essential experiment (x_1,..., x_n; alpha) only, we show that the cyclical consistency of alpha, together with a further consistency condition involving both (x_1,..., x_n) and alpha, guarantees the existence of a budget representation and that the essential experiment is rationalizable almost robustly, in the sense that there exists a single utility function which rationalizes at once almost all budget sets which are compatible with (x_1,..., x_n; alpha). The conditions are also trivially necessary. |
| Keywords: | Afriat's theorem, budget sets, cyclical consistency, rational choice, revealed preference |
| Date: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00727806&r=upt |
| By: | Marco A. Marini (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Paolo Polidori (University of Urbino); Desiree Teobaldelli (University of Urbino); Davide Ticchi (IMT Institute for Advanced Studies Lucca) |
| Abstract: | One of the standard predictions of the agency theory is that more incentives can be given to agents with lower risk aversion. In this paper we show that this relationship may be absent or reversed when the technology is endogenous and projects with a higher efficiency are also riskier. Using a modified version of the Holmstrom and Milgrom's (1987) framework, we obtain that lower agent's risk aversion unambiguously leads to higher incentives when the technology function linking efficiency and riskiness is elastic, while the risk aversion-incentive relationship can be positive when this function is rigid |
| Keywords: | principal-agent; incentives; risk aversion; endogenous technology |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:aeg:report:2014-1&r=upt |
| By: | Miroslav Pi\v{s}t\v{e}k; Frantisek Slanina |
| Abstract: | We use the Minority Game as a testing frame for the problem of the emergence of diversity in socio-economic systems. For the MG with heterogeneous impacts, we show that the direct generalization of the usual agents' profit does not fit some real-world situations. As a typical example we use the traffic formulation of the MG. Taking into account vehicles of various lengths it can easily happen that one of the roads is crowded by a few long trucks and the other contains more drivers but still is less covered by vehicles. Most drivers are in the shorter queue, so the majority win. To describe such situations, we generalized the formula for agents' profit by explicitly introducing utility function depending on an agent's impact. Then, the overall profit of the system may become positive depending on the actual choice of the utility function. We investigated several choices of the utility function and showed that this variant of the MG may turn into a positive sum game. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1401.4331&r=upt |
| By: | Stovall, John (University of Warwick) |
| Abstract: | We model a decision maker who anticipates being a ected by temptation but is also uncertain about what is normatively best. Our model is an extended version of Gul and Pesendorfer's (2001) where there are three time periods: in the ex-ante period the agent chooses a set of menus, in the interim period she chooses a menu from this set, and in the nal period she chooses from the menu. We posit axioms from the ex-ante perspective. Our main axiom on preference states that the agent prefers to have the option to commit in the interim period. Our representation is a generalization of Dekel et al.'s (2009) and identi es the agent's multiple normative preferences and multiple temptations. We also characterize the uncertain normative preference analogue to the representation in Stovall (2010). Finally, we characterize the special case where normative preference is not uncertain. This special case allows us to uniquely identify the representations of Dekel et al. (2009) and Stovall (2010). Key words: JEL classification: |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1036&r=upt |