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on Utility Models and Prospect Theory |
| By: | Aryal, Gaurab; Stauber, Ronald |
| Abstract: | Kuhn’s Theorem shows that extensive games with perfect recall can equivalently be analyzed using mixed or behavioral strategies, as long as players are expected utility maximizers. This note constructs an example that illustrates the limits of Kuhn’s Theorem in an environment with ambiguity averse players who use a maxmin decision rule and full Bayesian updating. |
| Keywords: | Extensive games; Ambiguity; Maxmin; Dynamic consistency |
| JEL: | C72 D81 |
| Date: | 2014–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57336&r=upt |
| By: | AMARANTE, Massimiliano |
| Abstract: | The concept of Ambiguity designates those situations where the information available to the decision maker is insufficient to form a probabilistic view of the world. Thus, it has provided the motivation for departing from the Subjective Expected Utility (SEU) paradigm. Yet, the formalization of the concept is missing. This is a grave omission as it leaves non-expected utility models hanging on a shaky ground. In particular, it leaves unanswered basic questions such as: (1) Does Ambiguity exist?; (2) If so, which situations should be labeled as ‘ambiguous’?; (3) Why should one depart from Subjective Expected Utility (SEU) in the presence of Ambiguity?; and (4) If so, what kind of behavior should emerge in the presence of Ambiguity? The present paper fills these gaps. Specifically, it identifies those information structures that are incompatible with SEU theory, and shows that their mathematical properties are the formal counterpart of the intuitive idea of insufficient information. These are used to give a formal definition of Ambiguity and, consequently, to distinguish between ambiguous and unambiguous situations. Finally, the paper shows that behavior not conforming to SEU theory must emerge in correspondence of insufficient information and identifies the class of non-EU models that emerge in the face of Ambiguity. The paper also proposes a new comparative definition of Ambiguity, and discusses its relation with some of the existing literature. |
| Keywords: | Non-expected utility, Information, Ambiguity |
| JEL: | D81 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2014-01&r=upt |
| By: | Morrison, William G. (Wilfrid Laurier University); Oxoby, Robert J. (University of Calgary) |
| 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: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8309&r=upt |
| By: | Bossert, Walter; Suzumura, Kotaro |
| Abstract: | We generalize the classical expected-utility criterion by weakening transitivity to Suzumura consistency. In the absence of full transitivity, reflexivity and completeness no longer follow as a consequence of the system of axioms employed and a richer class of rankings of probability distributions results. This class is characterized by means of standard expected-utility axioms in addition to Suzumura consistency. An important feature of some members of our new class is that they allow us to soften the negative impact of wellknown paradoxes without abandoning the expected-utility framework altogether. |
| JEL: | D81 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cisdps:627&r=upt |
| By: | James C. Cox; Vjollca Sadiraj; Ulrich Schmidt |
| Abstract: | Most experiments on decision theory ask individual subjects to make more than one decision. The isolation hypothesis is commonly used to justify the choice of the random lottery incentive mechanism as the preferred payoff protocol. This research note reports on the main findings on the theoretical and empirical performance of different payoff mechanisms on eliciting individuals’ attitudes toward risk. It challenges the conventional view that the random lottery incentive mechanism introduces no biases in inducing risk preferences |
| Keywords: | experiments, risk, payoff mechanisms, paradoxes, cross-task contamination |
| JEL: | C91 D81 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1932&r=upt |
| By: | Mickaël Beaud; Thierry Blayac; Maïté Stéphan |
| Abstract: | This paper derives new monetary measures of traveler’s willingness to pay to save travel time and to improve its reliability. We develop an intuitive model of transport mode choice in which each alternative is fully characterized by its price and the distribution of its random travel time, assuming expected utility preferences over the latter. Hence, the value of time (VOT) and the value of reliability (VOR) are defined and theirs properties are established. Finally, we use data from a discrete choice experiment in stated preferences to illustrate how our measures can provide behavioral estimations of the VOT and the VOR. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:14-06&r=upt |
| By: | Ulrich Schmidt; Christian Seidl |
| Abstract: | Common ratio effects should be ruled out if subjects' preferences satisfy compound independence, reduction of compound lotteries, and coalescing. In other words, at least one of these axioms should be violated in order to generate a common ratio effect. Relying on a simple experiment, we investigate which failure of these axioms is concomitant with the empirical observation of common ratio effects.We observe that compound independence and reduction of compound lotteries hold, whereas coalescing is systematically violated. This result provides support for theories which explain the common ratio effect by violations of coalescing (i.e., configural weight theory) instead of violations of compound independence (i.e., rank-dependent utility or cumulative prospect theory) |
| Keywords: | common ratio effect, coalescing, reduction, compound independence, event splitting, branch splitting, isolation effect, Allais paradox |
| JEL: | C91 C44 D81 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1930&r=upt |
| By: | Antoine Nebout; Marc Willinger |
| Abstract: | We investigate whether non-EU agents satisfy strategic dynamic consistency (SDC), i.e. "consistent planning" according to Strotz (1955). Depending on the dynamic axiom that is violated (dynamic consistency, consequentialism or reduction of compound lottery), we categorise non-EU individuals either as naïve, sophisticated or resolute. We rely on experimental data about individual behaviour to built a two-way categorisation of our subjects: firstly, either as EU or non-EU, and secondly either as SDC or non-SDC. Our main finding is that most non-EU subjects satisfy both SDC and dynamic consistency. This result raises an interesting theoretical puzzle about the dynamically consistent behaviour of non-EU agents. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:14-08&r=upt |
| By: | Tristan Le Cotty; Elodie Maître d’Hôtel; Raphaël Soubeyran; Julie Subervie |
| Abstract: | This paper investigates the reasons why African farmers differ in storage behavior and establishes a causal link between farmers’ time and risk preferences and storage. We first provide a stylized on farmstorage model in which impatience and risk aversion interact in the storage decision process. We show that impatience decreases grain storage whereas risk aversion may increase or decrease the quantity of grain stored from the harvest season to the lean season. We then test these propositions using original data on agricultural decisions, which we have collected from 1,500 farmers in two regions of Burkina Faso, who were also asked hypothetical questions about risk aversion and time discounting. Parameterized to our data, the model predicts that stored quantities decrease with impatience and increase with risk aversion. We then turn to an econometric analysis and provide an identification strategy which tackles a sample selection issue in our data [...]. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:14-07&r=upt |
| By: | Sheremeta, Roman |
| Abstract: | Standard theoretical prediction is that rational economic agents participating in rent-seeking contests should engage in socially inefficient behavior by exerting costly efforts. Experimental studies find that the actual efforts of participants are significantly higher than predicted and that over-dissipation of rents (or overbidding or over-expenditure of resources) can occur. Although the standard theory cannot explain over-dissipation, this phenomenon can be explained by incorporating behavioral dimensions into the rent-seeking contest, such as (1) the utility of winning, (2) relative payoff maximization, (3) bounded rationality, and (4) judgmental biases. These explanations are not exhaustive, but they provide a coherent picture of important behavioral dimensions that should be considered when studying rent-seeking behavior in theory and in practice. |
| Keywords: | rent-seeking, contests, experiments, overbidding, over-dissipation |
| JEL: | C72 C91 C92 D72 D74 |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57451&r=upt |
| By: | David Backus; Axelle Ferriere; Stanley Zin |
| Abstract: | We inject aggregate uncertainty – risk and ambiguity – into an otherwise standard business cycle model and describe its consequences. We find that increases in uncertainty generally reduce consumption, but they do not account, in this model, for either the magnitude or the persistence of the most recent recession. We speculate about extensions that might do better along one or both dimensions. |
| JEL: | D81 E32 G12 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20319&r=upt |
| By: | Dalia Ibrahim (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Frédéric Abergel (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris) |
| Abstract: | This paper studies the question of filtering and maximizing terminal wealth from expected utility in a stochastic volatility models. The special feature is that the only information available to the investor is the one generated by the asset prices and, in particular, the return processes cannot be observed directly and assumed to be modelled by a stochastic differential equation. Using stochastic non-linear filtering and change of measure techniques, the partial observation context can be transformed into a full information context such that coefficients depend only on past history of observed prices (filters processes). The main difficulty is that these filters are valued in infinite-dimensional space: it satisfy a stochastic partial differential equations named "Kushner-Stratonovich equations". We also show that we need to introduce an a priori models for the trend and the stochastic volatility in order to evaluate the filters processes. The dynamic programming or maximum principle are still applicable and the associated Bellman equation or Hamiltonian system are now in infinite dimension. |
| Keywords: | Partial information; stochastic volatility; utility maximization; non-linear filtering; Kushner-Stratonovich; infinite dimensional systems; dynamic programming |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01018869&r=upt |
| By: | Igor A. Bykadorov (National Research University Higher School of Economics); Alexey A. Gorn (Bocconi University); Sergey G. Kokovin (National Research University Higher School of Economics); Evgeny V. Zhelobodko |
| Abstract: | Studying the standard monopolistic competition model with unspecified utility/cost functions, we find necessary and sufficient conditions on the function elasticities, when an expanding market or trade incur welfare losses. Two numerical examples explain why: either excessive or insufficient entry of firms is aggravated by market growth. The variable marginal cost enforces the harmful effect. Still harm looks practically improbable. |
| Keywords: | Market distortions, Trade gains, Variable markups, Demand elasticity. |
| JEL: | F12 L13 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:61/ec/2014&r=upt |
| By: | Dreber-Almenberg, Anna; Fudenberg, Drew; Rand, David G. |
| Abstract: | We explore the extent to which altruism, as measured by giving in a dictator game (DG), accounts for play in a noisy version of the repeated prisoner's dilemma. We find that DG giving is correlated with cooperation in the repeated game when no cooperative equilibria exist, but not when cooperation is an equilibrium. Furthermore, none of the commonly observed strategies are better explained by inequity aversion or efficiency concerns than money maximization. Various survey questions provide additional evidence for the relative unimportance of social preferences. We conclude that cooperation in repeated games is primarily motivated by long-term payoff maximization and that even though some subjects may have other goals, this does not seem to be the key determinant of how play varies with the parameters of the repeated game. In particular, altruism does not seem to be a major source of the observed diversity of play. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:faseco:11923167&r=upt |
| By: | Azari Soufiani, Hossein; Diao, Hansheng; Lai, Zhenyu; Parkes, David C. |
| Abstract: | We propose a model for demand estimation in multi-agent, differentiated product settings and present an estimation algorithm that uses reversible jump MCMC techniques to classify agents' types. Our model extends the popular setup in Berry, Levinsohn and Pakes (1995) to allow for the data-driven classification of agents' types using agent-level data. We focus on applications involving data on agents' ranking over alternatives, and present theoretical conditions that establish the identifiability of the model and uni-modality of the likelihood/posterior. Results on both real and simulated data provide support for the scalability of our approach. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:faseco:12363923&r=upt |
| By: | David Bradford; Charles Courtemanche; Garth Heutel; Patrick McAlvanah; Christopher Ruhm |
| Abstract: | We investigate the predictive power of survey-elicited time preferences using a representative sample of US residents. In regressions controlling for demographics and risk preferences, we show that the discount factor elicited from choice experiments using multiple price lists and real payments predicts various health, energy, and financial outcomes, including overall self-reported health, smoking, drinking, car fuel efficiency, and credit card balance. We allow for time-inconsistent preferences and find that the long-run and present bias discount factors (δ and β) are each significantly associated in the expected direction with several of these outcomes. Finally, we explore alternate measures of time preference. Elicited discount factors are correlated with several such measures, including self-reported willpower. A multiple proxies approach using these alternate measures shows that our estimated associations between the time-consistent discount factor and health, energy, and financial outcomes may be conservative. |
| JEL: | D14 D91 I10 Q40 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20320&r=upt |