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on Utility Models and Prospect Theory |
| By: | David Kelsey (Department of Economics, University of Exeter); Tigran Melkonyan (University of Warwick) |
| Abstract: | The paper examines the e¤ect of ambiguity on contests where multiple parties expend resources to win a prize. We develop a model where contenders perceive ambiguity about their opponents’ strategies and determine how perceptions of ambiguity and attitudes to ambiguity affect equilibrium choice. The paper also investigates how equilibrium under ambiguity is related to behavior where contenders have expected utility preferences. Our model can explain experimental results such as overbidding and overspreading relative to Nash predictions. |
| Keywords: | Ambiguity, Contests, Choquet expected utility, neo-additive preferences. |
| JEL: | D81 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1411&r=upt |
| By: | S. Cerreia-Vioglio; F. Maccheroni; M. Marinacci; A. Rustichini |
| Abstract: | Maccheroni, Marinacci, and Rustichini [17], in an Anscombe-Aumann framework, axiomatically characterize preferences that are represented by the variational utility functional V (f) = min p2 Z u (f) dp + c (p) 8f 2 F; where u is a utility function on outcomes and c is an index of uncertainty aversion. In this paper, for a given variational preference, we study the class C of functions c that represent V . Inter alia, we show that this set is fully characterized by a minimal and a maximal element, c? and d?. The function c?, also identi?ed by Maccheroni, Marinacci, and Rustichini [17], fully characterizes the decision maker's attitude toward uncertainty, while the novel function d? characterizes the uncertainty perceived by the decision maker. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:520&r=upt |
| By: | Finus, M; Pintassilgo, Pedro; Ulph, Alistair |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:39840&r=upt |
| By: | Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)); Kimball, Miles S. (University of Michigan) |
| Abstract: | We develop a theory that focuses on the general equilibrium and long-run macroeconomic consequences of trends in job utility. Given secular increases in job utility, work hours per capita can remain approximately constant over time even if the income effect of higher wages on labor supply exceeds the substitution effect. In addition, secular improvements in job utility can be substantial relative to welfare gains from ordinary technological progress. These two implications are connected by an equation flowing from optimal hours choices: improvements in job utility that have a significant effect on labor supply tend to have large welfare effects. |
| Keywords: | Labor supply; work hours; drudgery; income effect; substitution effect; job utility |
| JEL: | E24 J22 O40 |
| Date: | 2014–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1106&r=upt |
| By: | Rahma Daly (University of Evry Val d’Essonne (EPEE)); Marc-Arthur Diaye (University of Evry Val d’Essonne (EPEE)); Jean-Max Koskievic (ESG Management School) |
| Abstract: | The French "2010 Household Wealth Survey" includes an experimental module that makes it possible to measure risk aversion in an objective manner. Using this survey, we analyse workers’ attitudes towards financial participation with respect to their attitudes towards risk. |
| Keywords: | Risk aversion, financial participation |
| JEL: | J33 M52 J54 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:14-03&r=upt |
| By: | Emilio Calvo (Universidad de Valencia. ERI-CES); Esther Gutiérrez-López (Departamento de Economía Aplicada IV. Universidad del País Vasco U.P.V./E.H.U.) |
| Abstract: | The family of discounted Shapley values is analyzed for cooperative games in coalitional form. We consider the bargaining protocol of the alternating random proposer introduced in Hart and Mas-Colell (1996). We demostrate that the discounted Shapley values arise as the expected payoffs associated with the bargaining equilibria when a time discount factor is considered. In a second model, we replace the time cost with the probability that the game ends without agreements. This model also implements these values in transferable utility games, moreover, the model implements the α-consistent values in the nontransferable utility setting. |
| Keywords: | Discounted Shapley value; egalitarianism; cooperative TU-games JEL |
| JEL: | C71 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:dbe:wpaper:0414&r=upt |
| By: | Hassan Omidi Firouzi; Andrew Luong |
| Abstract: | This paper is devoted to study the optimal portfolio problem. Harry Markowitz's Ph.D. thesis prepared the ground for the mathematical theory of finance. In modern portfolio theory, we typically find asset returns that are modeled by a random variable with an elliptical distribution and the notion of portfolio risk is described by an appropriate risk measure. In this paper, we propose new stochastic models for the asset returns that are based on Jumps- Diffusion (J-D) distributions. This family of distributions are more compatible with stylized features of asset returns. On the other hand, in the past decades, we find attempts in the literature to use well-known risk measures, such as Value at Risk and Expected Shortfall, in this context. Unfortunately, one drawback with these previous approaches is that no explicit formulas are available and numerical approximations are used to solve the optimization problem. In this paper, we propose to use a new coherent risk measure, so-called, Entropic Value at Risk(EVaR), in the optimization problem. For certain models, including a jump-diffusion distribution, this risk measure yields an explicit formula for the objective function so that the optimization problem can be solved without resorting to numerical approximations. |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1406.7040&r=upt |
| By: | Mattias Brachert; Walter Hyll |
| Abstract: | The majority of empirical studies make use of the assumption of stable preferences in searching for a relationship between risk attitude and the decision to become and stay an entrepreneur. Yet empirical evidence on this relationship is limited. In this paper, we show that entry into entrepreneurship itself plays a decisive role in shaping risk preferences. We find that becoming self-employed is indeed associated with a relative increase in risk attitudes, an increase that is quantitatively large and significant even after controlling for individual characteristics, different employment status, and duration of entrepreneurship. The findings suggest that studies assuming that risk attitudes are stable over time suffer from reverse causality; risk attitudes do not remain stable over time, and individual preferences change endogenously. |
| Keywords: | Endogenous preferences, Risk attitudes, Entrepreneurship, German Socio-Economic Panel |
| JEL: | D03 D81 M13 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp667&r=upt |
| By: | Christophette Blanchet (ICJ - Institut Camille Jordan - CNRS : UMR5208 - Université Claude Bernard - Lyon I (UCBL) - Ecole Centrale de Lyon - Institut National des Sciences Appliquées [INSA] : - LYON - Université Jean Monnet - Saint-Etienne); Etienne Chevalier (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE); Idriss Kharroubi (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Thomas Lim (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE) |
| Abstract: | We study the valuation of variable annuities for an insurer. We concentrate on two types of these contracts that are the guaranteed minimum death benefits and the guaranteed minimum living benefits ones and that allow the insured to withdraw money from the associated account. As for many insurance contracts, the price of variable annuities consists in a fee, fixed at the beginning of the contract, that is continuously taken from the associated account. We use a utility indifference approach to determine this fee and, in particular, we consider the indifference fee rate in the worst case for the insurer i.e. when the insured makes the withdrawals that minimize the expected utility of the insurer. To compute this indifference fee rate, we link the utility maximization in the worst case for the insurer to a sequence of maximization and minimization problems that can be computed recursively. This allows to provide an optimal investment strategy for the insurer when the insured follows the worst withdrawals strategy and to compute the indifference fee. We finally explain how to approximate these quantities via the previous results and give numerical illustrations of parameter sensibility. |
| Keywords: | Variable annuities, indifference pricing, backward stochastic differential equation, utility maximization, insurance. |
| Date: | 2014–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01017160&r=upt |
| By: | Etienne Chevalier (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE); Thomas Lim (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE); Ricardo Romo Roméro (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE) |
| Abstract: | In this paper, we work on indifference valuation of variable annuities and give a computation method for indifference fees. We focus on the guaranteed minimum death benefits and the guaranteed minimum living benefits and allow the policyholder to make withdrawals. We assume that the fees are continuously payed and that the fee rate is fixed at the beginning of the contract. Following indifference pricing theory, we define indifference fee rate for the insurer as a solution of an equation involving two stochastic control problems. Relating these problems to backward stochastic differential equations with jumps, we provide a verification theorem and give the optimal strategies associated to our control problems. From these, we derive a computation method to get indifference fee rates. We conclude our work with numerical illustrations of indifference fees sensibilities with respect to parameters. |
| Keywords: | Variable annuities; indifference pricing; stochastic control; utility maximization; backward stochastic differential equation |
| Date: | 2014–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01017157&r=upt |
| By: | Arthur Charpentier (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Benoît Le Maux (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie) |
| Abstract: | This paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes. In contrast to conventional models of insurance, the insurer has a non-zero probability of insolvency which depends on the distribution of the risks, the premium rate, and the amount of capital in the company. When the insurer is insolvent, each loss reduces the indemnity available to the victims, thus generating negative pecuniary externalities. Our model shows that government-provided insurance will be more attractive in terms of expected utility, as it allows these negative pecuniary externalities to be spread equally among policyholders. However, when heterogeneous risks are introduced, a government program may be less attractive in safer areas, which could yield inefficiency if insurance ratings are not chosen appropriately. |
| Keywords: | Insurance; Natural catastrophe; Externalities; Government intervention; Strong Nash equilibrium |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01018022&r=upt |
| By: | Giorgio Fabbri (EPEE, Université d’Evry-Val-d’Essonne (TEPP, FR-CNRS 3126)); Silvia Faggian (Università di Venezia “Ca’ Foscari”); Giuseppe Freni (University of Naples Parthenope) |
| Abstract: | The paper provides a continuous-time version of the discrete-time Mitra- Wan model of optimal forest management, where trees are harvested to maximize the utility of timber flow over an infinite time horizon. The available trees and the other parameters of the problem vary continuously with respect to both time and age of the trees, so that the system is ruled by a partial differential equation. The behavior of optimal or maximal couples is classified in the cases of linear, concave or strictly concave utility, and positive or null discount rate. All sets of data share the common feature that optimal controls need to be more general than functions, i.e. positive measures. Formulas are provided for golden-rule configurations (uniform density functions with cutting at the ages that solve a Faustmann problem) and for Faustmann poli- cies, and their optimality/maximality is discussed. The results do not always confirm the corresponding ones in discrete time. |
| Keywords: | Optimal harvesting problems, Forest Management, Measurevalued Control |
| JEL: | C61 C62 E22 D90 Q23 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:14-04&r=upt |