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on Utility Models and Prospect Theory |
| By: | Astrid Gamba (Department of Economics, University of Milan Bicocca); Elena Manzoni (Department of Economics, University of Milan Bicocca) |
| Abstract: | We study theoretically and experimentally decision making under uncertainty in a social environment. We introduce an interdependent preferences model that assumes that the decision maker evaluates monetary outcomes in relation both with his individual and his social reference point. In the experiment we reproduce a workplace environment whereby subjects interact in an effort task, earn (possibly) different wages from this task and then undertake a risky decision that may give them an extra bonus. Controlling for intrinsic risk attitudes, we find that both downward and upward social comparison strongly influence risk attitudes and that they both generate more risk loving behavior. Moreover, we find that a propension to envy counterposes such effect, by increasing risk aversion. |
| Keywords: | Social comparison, risk aversion, interdependent preferences, reference point |
| JEL: | C91 D03 D81 |
| Date: | 2014–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-001&r=upt |
| By: | Daichi Shimamoto (Graduate School of Economics, Osaka University, Japan. Research Fellow, Japan Society for the Promotion of Science, Japan); Hiroyuki Yamada (Osaka School of International Public Policy, Osaka University, Japan); Ayako Wakano (Graduate School of Economics, Osaka University, Japan) |
| Abstract: | This paper investigates how farmersf risk attitudes affected the adoption of agricultural technology in a rural area in Cambodia. We incorporated prospect theory to farmersf utility function and examined the effect of the risk attitude of farmers to the adoption of two technologies: adoption of a moisture meter for measuring the moisture content of seeds, a recently introduced post-harvest technology, and a modern rice variety that was introduced in the 1990s. The results indicated that farmers overweighted a small probability and risk averse farmers adopted a moisture meter to measure the moisture contents of seeds significantly. With respect to the modern rice variety, farmersf risk attitude did not affect the adoption. Our results and the results of a previous study imply that the type of risk and uncertainty faced by farmers at the time of decision-making of its adoption partly determine the effect of risk attitude on agricultural adoption. |
| Keywords: | technology adoption, risk preferences, prospect theory |
| JEL: | O14 O33 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1407&r=upt |
| By: | Oumar Mbodji (FiME Lab, IMPA); Adrien Nguyen Huu (FiME Lab, IMPA); Traian A. Pirvu |
| Abstract: | We study the Merton problem of optimal consumption-investment for the case of two investors sharing a final wealth. The typical example would be a husband and wife sharing a portfolio looking to optimize the expected utility of consumption and final wealth. Each agent has different utility function and discount factor. An explicit formulation for the optimal consumptions and portfolio can be obtained in the case of a complete market. The problem is shown to be equivalent to maximizing three different utilities separately with separate initial wealths. We study a numerical example where the market price of risk is assumed to be mean reverting, and provide insights on the influence of risk aversion or discount rates on the initial optimal allocation. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.1052&r=upt |
| By: | Bosi, Gianni; Herden, Gerhard |
| Abstract: | On basis of the meanwhile classical continuous multi-utility representation theorem of Levin on locally compact and $\sigma$-compact Hausdorff-spaces the question of characterizing all topological spaces $(X,t)$ for which every closed and semi-closed preorder respectively admits a continuous multi-utility representation will be discussed. In this way we are able to provide the fundaments of a purely topological theory that systematically combines topological and order theoretic aspects of the continuous multi-utility representation problem. |
| Keywords: | Normal preorder, strongly normal preorder \sep paracompact space, Lindelof space, metrizable space |
| JEL: | C02 |
| Date: | 2014–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53404&r=upt |
| By: | Asano, Takao (Okayama University); Okudaira, Hiroko (Okayama University); Sasaki, Masaru (Osaka University) |
| Abstract: | This paper's objective is to design a laboratory experiment to explore the effect of ambiguity on a subject's search behavior in a finite-horizon sequential search model. In so doing, we employ a new approach to observe the potential trend of reservation points that is usually unobserved. We observe a significant dip in a trend of reservation points when subjects are faced with ambiguity over wage distributions. |
| Keywords: | experiment, search model, ambiguity, reservation wage |
| JEL: | C91 D81 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7933&r=upt |
| By: | Dirk Broeders; An Chen; Birgit Koos |
| Abstract: | Adequate funding of occupational pension plans is key to benefit security. Across countries different methods of securing funding exist: solvency requirements, a pension guarantee fund, and sponsor support. The key goal of this paper is to investigate the welfare implications to the beneficiary in a hybrid pension scheme. We show that the three security mechanisms can be made utility-equivalent by adjusting the pension contract specifications. The utility-equivalence approach could serve to strengthen the \holistic balance sheet" approach as advised by EIOPA. It enables regulators to compare various pension systems across Europe in a single framework from a utility perspective instead of a valuation perspective. |
| Keywords: | Pension plans; pension regulation; guarantee systems; power utility; certainty equivalents |
| JEL: | G11 G23 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:414&r=upt |
| By: | Filippin, A.; Crosetto, P. |
| Abstract: | This paper reconsiders the wide agreement that females are more risk averse than males providing a leap forward in its understanding. Thoroughly surveying the literature we first find that gender differences are less ubiquitous than usually depicted. Gathering the microdata of an even larger sample of Holt and Laury replications we boost the statistical power of the test and we show that the magnitude of gender differences, although significant, is economically unimportant. We conclude that gender differences systematically correlate with the features of the elicitation method used and in particular the availability of a safe option and fixed probabilities. |
| Keywords: | GENDER;RISK;SURVEY |
| JEL: | C81 C91 D81 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:2014-01&r=upt |
| By: | EECKHOUDT, Louis |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvrp:-2514&r=upt |
| By: | Andrew Caplin; Mark Dean |
| Abstract: | We develop a revealed preference test for optimal acquisition of costly information. The test encompasses models of rational inattention, sequential signal processing, and search. We provide limits on the extent to which attention costs can be recovered from choice data. We experimentally elicit state dependent stochastic choice data of the form the tests require. In simple cases, tests confirm that subjects adjust their attention in response to incentives as the theory dictates. |
| JEL: | D80 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19876&r=upt |
| By: | Silvia Figini (Department of Political and Social Sciences, University of Pavia); Mario Maggi (Department of Economics and Management, University of Pavia) |
| Abstract: | The performance of predictions models can be assessed using a variety of methods and metrics. Several new measures have recently been proposed that can be seen as refinements of discrimination measures, including variants of the AUC (Area Under the ROC curve), such as the H index. It is widely recognized that AUC suffers from lack of coherency especially when ROC curves cross. On the other hand, the H index requires subjective choices. In our opinion the problem of model comparison should be more adequately handled using a different approach. The main contribution of this paper is to evaluate the performance of prediction models using proper loss function. In order to compare how our approach works with respect to classical measures employed in model comparison, we propose a simulation studies, as well as a real application on credit risk data. |
| Keywords: | Model Comparison, AUC, H index, Loss Function, Proper Scoring Rules, Credit Risk |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0064&r=upt |