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on Utility Models and Prospect Theory |
| By: | Lahno, Amrei M. |
| Abstract: | I experimentally examine whether feedback about others' choices provides an anchor for decision-making under ambiguity. In a between-subjects design I vary whether subjects learn choices made individually by a "peer" in a first part when facing the same task a second time, and whether prospects are defined over gains or losses. My key findings are that the relative ambiguity attitude (compared to the peer's) significantly matters for shifts in individual attitudes, and that dynamics considerably differ between gain and loss domains. For gains, learning to be comparably ambiguity averse increases the likelihood for such shifts, relative to the individual condition; for losses, this likelihood decreases only if peers learn to exhibit exactly the same attitude. Further, I observe imitative shifts towards the peer's attitude in the gain domain, but only towards neutrality in the loss domain. Shifts towards neutrality for losses also appear significant without social anchor suggesting that ambiguity seeking might not be particularly robust. Moreover, cognitive ability positively correlates to shifts towards neutrality in the gain domain, but has no impact in the loss domain. |
| Keywords: | Decision-making under uncertainty; ambiguity; social comparison; learning; laboratory experiment. |
| JEL: | C91 D03 D81 D83 |
| Date: | 2014–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:20960&r=upt |
| By: | Dominique Henriet (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Patrick A. Pintus (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Alain Trannoy (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| Abstract: | We derive testable conditions ensuring that the income tax is optimal when agents are ex-ante identical but face idiosyncratic income risk. The optimal tax depends positively on both absolute risk aversion and risk variance and negatively on labor supply elasticity and absolute prudence. The comparison with the formula of the optimal non-linear income tax provides the restrictions on both the preferences and the income distribution conditional on effort ensuring that the optimal tax is indeed linear. In general it requires that the ratio of absolute prudence to absolute risk aversion be no less than two; if the income density has a linear likelihood ratio, it requires a (generalized) logarithmic consumption utility. Under HARA utility and linear or logarithmic likelihood ratios, explicit solutions for the optimal non-linear income tax are derived. |
| Keywords: | optimal income taxation; income risk; linear and nonlinear income tax |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00999222&r=upt |
| By: | Hao, Li (University of Arkansas, Fayetteville); Houser, Daniel (George Mason University); Mao, Lei (GATE, University of Lyon); Villeval, Marie Claire (CNRS, GATE) |
| Abstract: | Using a field experiment in China, we study whether migration status is correlated with attitudes toward risk, ambiguity, and competitiveness. Our subjects include migrants and non-migrants. We find that, migrants exhibit no differences from non-migrants in risk and ambiguity preferences elicited using pairs of lotteries; however, migrants are significantly more likely to enter competition in the presence of strategic uncertainty when they expect competitive entries from others. Our results suggest that migration may be driven more by a stronger belief in one's ability to succeed in an uncertain and competitive environment than by risk attitudes under state uncertainty. |
| Keywords: | migration, risk preferences, strategic uncertainty, ambiguity, field experiment |
| JEL: | C93 D03 D63 J61 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8227&r=upt |
| By: | Oscar Lopez; Rafael Serrano |
| Abstract: | We study optimal investment strategies that maximize expected utility from consumption and terminal wealth in a pure-jump asset price model with Markov-modulated (regime switching) jump-size distributions. We give sufficient conditions for existence of optimal policies and find closed-form expressions for the optimal value function for agents with logarithmic and fractional power (CRRA) utility in the case of two-state Markov chains. The main tools are convex duality techniques, stochastic calculus for pure-jump processes and explicit formulae for the moments of telegraph processes with Markov-modulated random jumps. |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1406.3112&r=upt |
| By: | Zahra Murad (School of Economics, University of Nottingham); Chris Starmer (Department of Economics, University of Amsterdam); Martin Sefton (School of Economics, University of Nottingham) |
| Abstract: | We examine confidence in own absolute performance using two elicitation procedures: self-reported (non-incentivised) confidence and an incentivised procedure that elicits the certainty equivalent of a bet based on performance. The former procedure reproduces the“hard-easy effect†(overconfidence in easy tasks and underconfidence in hard tasks) found in a large number of studies using non-incentivised self-reports. The latter procedure produces general underconfidence, which is somewhat reduced when we filter out the effects of risk attitudes. However, even after controlling for risk attitudes our incentivised procedure leads to significant underconfidence, and does not lead to better calibration between confidence and performance than non-incentivised self-reports. Finally, we find that self-reported confidence correlates significantly with features of individual risk attitudes including parameters of individual probability weighting. |
| Keywords: | Overconfidence, Underconfidence, Experiment, Risk Preferences |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2014-05&r=upt |
| By: | Charles Figuieres (Laboratoire Montpelliérain d'Economie Théorique et Appliquée, INRA); David Masclet (CREM, Centre de Recherches en Economie et Management, Université de Rennes 1); Marc Willinger (Laboratoire Montpelliérain d'Economie Théorique et Appliquée, INRA; Université Montpellier 1) |
| Abstract: | This paper provides a general framework that accounts for the decay of the average contribution observed in most experiments on voluntary contributions to a public good. Each player balances her material utility loss from contributing with her psychological utility loss of deviating from her moral ideal. The novel and central idea of our model is that peoples moral motivation is "weak": their judgement about what is the right contribution to a public good can evolve in the course of interactions, depending partly on observed past contributions and partly on an intrinsic "moral ideal". Under the assumption of weakly morally motivated agents, average voluntary contributions can decline with repetition of the game. Our model also explains other regularities observed in experiments, in particular the phenomenon of over-contributions compared to the Nash prediction and the so-called restart effect, and it is compatible with the conditional cooperation hypothesis. |
| Keywords: | CONDITIONAL COOPERATION, VOLUNTARY CONTRIBUTIONS, MORAL MOTIVATION, EXPERIMENTS ON PUBLIC GOODS GAMES., THEORIE DES JEUXÂ , bien public, économie expérimentale, bien public |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:inr:wpaper:46420&r=upt |
| By: | Vivien Lespagnol (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Juliette Rouchier (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | This paper studies the effect of investor’s bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are exchanged. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor’s demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader’s belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the unknown fundamental has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly. |
| Keywords: | Agent-based modeling, market microstructure, fundamental value, trading volume, _efficient market |
| JEL: | C63 D44 G12 G14 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1419&r=upt |
| By: | Burak Can (School of Business and Economics, Maastricht University - Department of Economics); Ali Ihsan Ozkes (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Department of Economics, Bilgi University - Istanbul Bilgi University); Ton Storcken (Department of Quantitative Economics, Maastricht University - (-)) |
| Abstract: | In this paper, we study the measurement of polarization in collective decision making problems with ordinal preferences over alternatives. We argue that polarization can be measured as an aggregation of antagonisms over pairs of alternatives in the society. We propose a measure of this sort and show that it is the only measure satisfying some normatively appealing conditions. |
| Date: | 2014–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00998513&r=upt |
| By: | Gomes, Fábio Augusto Reis; Issler, João Victor |
| Abstract: | The objective of this paper is to test for optimality of consumption decisions at theaggregate level (representative consumer) taking into account popular deviations from thecanonical CRRA utility model rule of thumb and habit. First, we show that rule-of-thumbbehavior in consumption is observational equivalent to behavior obtained by the optimizingmodel of King, Plosser and Rebelo (Journal of Monetary Economics, 1988), casting doubt onhow reliable standard rule-of-thumb tests are. Second, although Carroll (2001) and Weber(2002) have criticized the linearization and testing of euler equations for consumption, weprovide a deeper critique directly applicable to current rule-of-thumb tests. Third, we showthat there is no reason why return aggregation cannot be performed in the nonlinear setting ofthe Asset-Pricing Equation, since the latter is a linear function of individual returns. Fourth,aggregation of the nonlinear euler equation forms the basis of a novel test of deviationsfrom the canonical CRRA model of consumption in the presence of rule-of-thumb and habitbehavior. We estimated 48 euler equations using GMM, with encouraging results vis-a-vis theoptimality of consumption decisions. At the 5% level, we only rejected optimality twice outof 48 times. Empirical-test results show that we can still rely on the canonical CRRA modelso prevalent in macroeconomics: out of 24 regressions, we found the rule-of-thumb parameter ƛ to be statistically signi cant at the 5% level only twice, and the habit ƴ parameter to bestatistically signi cant on four occasions. The main message of this paper is that proper return aggregation is critical to studyintertemporal substitution in a representative-agent framework. In this case, we fi nd littleevidence of lack of optimality in consumption decisions, and deviations of the CRRA utility model along the lines of rule-of-thumb behavior and habit in preferences represent theexception, not the rule. |
| Date: | 2014–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:752&r=upt |
| By: | Abdessalem Abbassi; Ahlem Dakhlaoui; Lota D.Tamini |
| Abstract: | This article analyses management of hydropower dams within monopolistic and oligopolistic competition and when hydroelectricity producers are risk averse and face demand uncertainty. In each type of market structure we analytically determine the water release path in closed-loop equilibrium. We show how a monopoly can manage its hydropower dams by additional pumping or storage depending on the relative abundance of water between different regions to smooth the effect of uncertainty on electricity prices. In the oligopolistic case with symmetric risk aversion coefficient, we determine the conditions under which the relative scarcity (abundance) of water in the dam of a hydroelectric operator can favor additional strategic pumping (storage) in its competitor’s dams. When there is asymmetry of the risk aversion coefficient, the firm’s hydroelectricity production increases as its competitor’s risk aversion increases, if and only if the average recharge speed of the competitor’s dam exceeds a certain threshold, which is an increasing function of its average water inflows. |
| Keywords: | Closed-loop Cournot competition, electricity wholesale market, hydropower dams, demand uncertainty, asymmetric risk aversion |
| JEL: | L94 Q25 C61 C73 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:creacr:2014-4&r=upt |