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on Utility Models and Prospect Theory |
| By: | Thierry Chauveau (Centre d'Economie de la Sorbonne) |
| Abstract: | Although it is endowed with many interesting properties, the theory of decision-making under risk by Loomes and Sugden [1986] has never been given an axiomatics. In this paper, we make up for this omission because their lottery-dependent functional is endowed with many interesting properties to which little attention has been paid up to now. In particular, investors whose preferences are represented by the functional are rational in that (a) they actually behave differently if they are risk averse or risk prone, (b) risk is defined in a consistent way with risk aversion, (c) the functional is but the opposite to a convex measure of risk (Föllmer ans Schied [2002]) when constant marginal utility is assumed and (d) violations of the second-order stochastic dominance property are allowed for when "utils" are substituted for monetary values. Moreover, the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible and utility functions may be elicited through experimental testing. |
| Keywords: | Disappointment, risk-aversion, expected utility, risk premium, stochastic dominance, subjective risk. |
| JEL: | D81 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14054&r=upt |
| By: | Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | This paper elaborates an axiomatic treatment of the Subjective Expected Utility (SEU) model that dispenses with the assumption of an exogenous state space. Within a state-free description of uncertainty and alternatives, axioms for preferences are formulated and shown to characterize the existence of a subjective state space, a subjective probability and a utility function. In the representation, the individual appears to behave as if he used the state space to describe uncertainty and maximized SEU to make decisions. Moreover, the state space, probability and utility are unique in some appropriate sense. |
| Keywords: | Expected utility, subjective state space, causality, consequentialism. |
| JEL: | D81 D90 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14047&r=upt |
| By: | Antoine Billot (LEMMA - Université Panthéon-Assas and IUF); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | This paper seeks to interpret observable behavior and departures from Savage's model of Subjective Expected Utility (SEU) in terms of knowledge and belief. It is shown that observable behavior displays sensitivity to ambiguity if and only if knowledge and belief disagree. In addition, such an epistemic interpretation of ambiguity leads to dynamically consistent extensions of non-SEU preferences. |
| Keywords: | Ambiguity, state of the world, knowledge, dynamic consistency. |
| JEL: | D81 D83 D90 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14048&r=upt |
| By: | Rose-Anne Dana (CEREMADE - Université Paris-Dauphine and IPAG Business School); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG and VCREME) |
| 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 condition for the 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 represented by a family of concave utility functions. Several definitions of efficiency and of equilibrium with inertia are considered. Sufficient conditions and necessary and sufficient conditions are given for the 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: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14041&r=upt |
| By: | Morrison, William G. and Robert Oxoby (Wilfrid Laurier University) |
| Abstract: | We report the results of a laboratory experiment testing for the existence of loss aversion in a standard risk aversion protocol (Holt and Laury, 2002). In our experiment, participants earn and retain money for a week before using it in an incentivized risk preference elicitation task. We find loss aversion, distinct from risk aversion, has a significant effect on behavior resulting in participants requiring higher compensation to bear risk. |
| Keywords: | risk aversion, loss aversion, experiments |
| JEL: | C91 D91 |
| Date: | 2014–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:wlu:lcerpa:0073&r=upt |
| By: | Antoine Billot (LEMMA - Université Panthéon-Assas and IUF); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | Harsanyi's axiomatic justification of utilitarianism is extended to a framework with subjective and heterogenous priors. Contrary to the existing literature on aggregation of preferences under uncertainty, society is here allowed to formulate probability judgements, not on the actual state of the world as individuals do, but rather on the opinion they each have on the actual state. An extended Pareto condition is then proposed that characterizes the social utility function as a convex combination of individual ones and the social prior as the independent product of individual ones. |
| Keywords: | Utilitarianism, prior heterogeneity, Pareto condition. |
| JEL: | D71 D81 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14049&r=upt |
| By: | Carolyn Czoski-Murray (Leeds Institute of Health Sciences, University of Leeds); David Meads (Leeds Institute of Health Sciences, University of Leeds); Richard Edlin (School of Population Health, University of Auckland, New Zealand); Claire Hulme (Leeds Institute of Health Sciences, University of Leeds); Claudi Gorecki (Clinical Trials Research Unit, University of Leeds); Jane Nixon (Clinical Trials Research Unit, University of Leeds); Christopher McCabe (University of Alberta, Edmonton, Canada) |
| Abstract: | Aim: Pressure Ulcers are an important health care problem, recognized as ‘Never Events’ by the US Government. To date, there is no instrument to capture their health utility impact, or the value of treatments and prevention strategies. The Pressure Ulcer Quality of Life Utility Instrument (PUQol-UI) is a condition specific preference-based measure designed to capture the impact of having a pressure ulcer (PU) on an individual’s health related quality of life and will allow calculation of QALYs necessary for cost-effectiveness analyses. PUQol-UI consists of 7 domains (Pain, Mobility, Activities of Daily Living, Energy, Depression, Burden and Social Function). Each domain has three possible response levels: ‘No Bother’, ‘Little Bother’, and ‘A lot of Bother’. Methods: A valuation exercise obtained Time Trade-Off values for 51 PUQol-UI health states in 200 interviews with the UK General Population. OLS, Random Effects and Fixed Effects linear regression models were fitted and evaluated using tests of standard goodness of fit and estimation and validation sample predictive performance. Results: The Random Effects model was superior in fit and predictive performance, with 83% of states predicted to within 0.1 of the observed mean. Preliminary analysis of the psychometric properties of the PUQoL-UI indicates adequate levels of validity and may offer measurement advantages over the generic EQ-5D measure. Conclusions: The PUQol-UI is a useful addition to the portfolio of condition specific utility measures available to researchers interested in economic evaluation of technologies for the management of pressure ulcers, and health care decision makers responsible for funding such technologies. |
| Keywords: | Cost-effective Analysis; QALYs; PUQoL; Pressure Ulcer; Quality of life; |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lee:wpaper:1404&r=upt |
| By: | Hedges, Jules; Oliva, Paulo; Winschel, Evguenia; Winschel, Viktor; Zahn, Philipp |
| Abstract: | We use quantifiers and selection functions to represent simultaneous move games. Quantifiers and selection functions are examples of higher-order functions. A higher order function is a function whose domain is itself a set of functions. Thus, quantifiers and selection func- tions allow players to form goals not only about outcomes but about the whole (or parts) of the game play. They encompass standard pref- erences and utility functions as special cases, but also extend to non-maximizing behavior and context-dependent motives. We adapt the Nash equilibrium concept to our new representation and also introduce a refinement to capture the essential features of context-dependent motives. As an example, we discuss fixpoint operations as context dependent goals of coordination and differentiation in simultaneous game variants of Keyne's beauty contest and the minority game. |
| Keywords: | context dependent refinement of Nash equilibrium , higher order functions , quantifiers , selection functions , beauty contest , minority game , endogenous economist |
| JEL: | C0 D01 D03 D63 D64 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mnh:wpaper:36178&r=upt |
| By: | Löffler, Max; Peichl, Andreas; Siegloch, Sebastian |
| Abstract: | There is still considerable dispute about the magnitude of labor supply elasticities. While differences in micro and macro estimates are recently attributed to frictions and adjustment costs, we show that relatively low labor supply elasticities derived from microeconometric models can also be explained by modeling assumptions with respect to wages. Specifically, we estimate 3,456 structural labor supply models each representing a plausible combination of frequently made choices. While most model assumptions do not systematically affect labor supply elasticities, our analysis shows that the results are very sensitive to the treatment of wages. In particular, the often-made but highly restrictive independence assumption between preferences and wages is key. To overcome this restriction, we propose a flexible estimation strategy that nests commonly used models. We show that loosening the exogeneity assumption leads to labor supply elasticities that are much higher. -- |
| Keywords: | labor supply,elasticity,random utility models,wages |
| JEL: | C25 C52 H31 J22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14040&r=upt |