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on Utility Models and Prospect Theory |
| By: | Harin, Alexander |
| Abstract: | Three main groups of results have been obtained: 1) The question is emphasized whether the probability weighting function W(p) is continuous. If W(p) reveals a discontinuity at p=1, then this is a topological feature. This can qualitatively change (at least) the mathematical aspects of the utility and prospect theories. This is supported by a number of the evidences of the qualitative difference between subjects’ treatments of the probabilities of probable and certain outcomes. 2) Purely mathematical theorems prove (under several conditions) that if the dispersion of data (the noise) is non-zero, then the non-zero discontinuity take place at the probability p=1. 3) In the prevailing random-lottery incentive system of the experiments of the utility and prospect theories, the choices of certain outcomes are stimulated by uncertain lotteries. Because of this evident “certain-uncertain” inconsistency, the deductions from the random-lottery incentive experiments, those include the certain outcomes, cannot be unquestionably correct. The experiment of Starmer and Sugden (1991) evidently supports this consideration. |
| Keywords: | utility; prospect theory; experiment; incentive; random-lottery incentive system; Prelec; probability weighting function; |
| JEL: | C1 C9 C91 D8 D81 |
| Date: | 2014–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55706&r=upt |
| By: | Gigi Foster; Paul Frijters; Markus Schaffner; Benno Torgler |
| Abstract: | We examine the nature of stated subjective probabilities in a complex, evolving context in which true event probabilities are not within subjects' explicit information set. Specifically, we collect information on subjective expectations in a car race wherein participants must bet on a particular car but cannot influence the odds of winning once the race begins. In our setup, the actual probability of the good outcome (a win) can be determined based on computer simulations from any point in the process. We compare this actual probability to the subjective probability participants provide at three different points in each of 6 races. We find that the S-shaped curve relating subjective to actual probabilities found in prior research when participants have direct access to actual probabilities also emerges in our much more complex situation, and that there is only a limited degree of learning through repeated play. We show that the model in the S-shaped function family that provides the best fit to our data is Prelec's (1998) conditional invariant model. |
| Keywords: | behavioural economics; expected utility theory; experiments; expectations; probabilities |
| JEL: | D40 L10 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2013-19&r=upt |
| By: | Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Julien Trufin (Ecole d'Actuariat - Universite Laval (Quebec) - Canada) |
| Abstract: | This paper studies a new risk measure derived from the expected area in red introduced in Loisel (2005). Specifically, we derive various properties of a risk measure defined as the smallest initial capital needed to ensure that the expected time-integrated negative part of the risk process on a fixed time interval [0; T] (T can be infinite) is less than a given predetermined risk limit. We also investigate the optimal risk limit allocation: given a risk limit set at company level for the sum of the expected areas in red of all lines, we determine the way(s) to allocate this risk limit to the subsequent business lines in order to minimize the overall capital needs. |
| Keywords: | Ruin probability; risk measure; expected area in red; stochastic ordering; risk limit |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00870224&r=upt |
| By: | Kukushkin, Nikolai S. |
| Abstract: | A rather general class of strategic games is described where the coalition improvements are acyclic and hence strong equilibria exist: The players derive their utilities from the use of certain "facilities"; all players using a facility extract the same amount of "local utility" therefrom, which amount depends both on the set of users and on their actions, and is decreasing in the set of users; the "ultimate" utility of each player is the minimum of the local utilities at all relevant facilities. Two important subclasses are "games with structured utilities," basic properties of which were discovered in 1970s and 1980s, and "bottleneck congestion games," which attracted researchers' attention quite recently. The former games are representative in the sense that every game from the whole class is isomorphic to one of them. The necessity of the minimum aggregation for the "persistent" existence of strong equilibria, actually, just Pareto optimal Nash equilibria, is established. |
| Keywords: | Strong equilibrium; Weakest-link aggregation; Coalition improvement path; Congestion game; Game with structured utilities |
| JEL: | C72 |
| Date: | 2014–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55499&r=upt |