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on Utility Models and Prospect Theory |
| By: | Manzini, Paola; Mariotti, Marco |
| Abstract: | We model the choice behaviour of an agent who suffers from imperfect attention. We define inattention axiomatically through preference over menus and endowed alternatives: an agent is inattentive if it is better to be endowed with an alternative a than to be allowed to pick a from a menu in which a is is the best alternative. This property and vNM rationality on the domain of menus and alternatives imply that the agent notices each alternative with a given menu-dependent probability (attention parameter) and maximises a menu independent utility function over the alternatives he notices. Preference for flexibility restricts the model to menu independent attention parameters as in Manzini and Mariotti [19]. Our theory explains anomalies (e.g. the attraction and compromise effect) that the Random Utility Model cannot accommodate. |
| Keywords: | bounded rationality, stochastic choice, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:558&r=upt |
| By: | Rosa, franco |
| Abstract: | Many studies suggest that farmers frequently show risk averse attitudes, and choose the “riskminimizing” and “safety first” survival strategy rather than pursuing the profit maximization. This article reports on a study of the impact of risk caused by different events: climate, stock levels, price volatility and other causes affecting the yield and price variability of agricultural crops. This study will simulate the risk in farm decisions using a sumex utility function that allows to parameterize the risk for specific traits of the function, and MOTAD (minimization of total absolute deviations) to simulate an efficient combination of crops in the whole farm planning (WFP). The empirical analysis is represented by a case study consisting in the risk simulation of a farm of 100 Ha, growing vegetable crops located in the Northern region of Italy. The risk is modelled using 15 years historical observations with discrete probability distribution of some of the most diffused cereal and oilseed crops (source: Eurostat). The objective is to evaluate the risk aversion by designing a utility frontier of crop combinations using a LP approximation model. The results indicate the trade off between expected returns and risk: if the value of gross income is expected to increase, the farmers tend to specialize in the most profitable portfolio enterprise while it is not so evident that the diversification will contribute to curb the risk. |
| Keywords: | whole farm planning, risk, sumex utility function, LP-MOTAD, portfolio analysis, Agribusiness, Productivity Analysis, Risk and Uncertainty, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aiea14:173126&r=upt |
| By: | Philip J. Reny (University of Chicago) |
| Abstract: | For an arbitrary finite or infinite dataset D of prices and corresponding chosen bundles, it is shown that the following three conditions are equivalent. (i) D satisfies GARP; (ii) D can be rationalized by a utility function; (iii) D can be rationalized by a strictly increasing, quasiconcave utility function. Examples of infinite datasets satisfying GARP are provided for which every utility rationalization fails to be lower semicontinuous, upper semicontinuous, or concave. Thus condition (iii) cannot be substantively improved upon. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfi:wpaper:2014-004&r=upt |
| By: | David Hobson; Yeqi Zhu |
| Abstract: | In this article we consider a special case of an optimal consumption/optimal portfolio problem first studied by Constantinides and Magill and by Davis and Norman, in which an agent with constant relative risk aversion seeks to maximise expected discounted utility of consumption over the infinite horizon, in a model comprising a risk-free asset and a risky asset with proportional transaction costs. The special case that we consider is that the cost of purchases of the risky asset is infinite, or equivalently the risky asset can only be sold and not bought. In this special setting new solution techniques are available, and we can make considerable progress towards an analytical solution. This means we are able to consider the comparative statics of the problem. There are some surprising conclusions, such as consumption rates are not monotone increasing in the return of the asset, nor are the certainty equivalent values of the risky positions monotone in the risk aversion. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1409.3394&r=upt |
| By: | Andreas Pondorfer; Toman Omar Mahmoud; Katrin Rehdanz; Ulrich Schmidt |
| Abstract: | We use a controlled experiment to analyze gender differences in risk preferences and stereotypes about risk preferences of men and women across two distinct island societies in the Pacific: the patrilineal Palawan in the Philippines and the matrilineal Teop in Papua New Guinea. We find no gender differences in actual risk preferences, but evidence for culture-specific stereotypes. Like men in Western societies, Palawan men overestimate women’s actual risk aversion. By contrast, Teop men underestimate women’s actual risk aversion. We argue that observed differences in stereotypes between the two societies are determined by the different social status of women |
| Keywords: | Gender roles, culture, stereotype, experiment, risk aversion |
| JEL: | C93 D81 J15 J16 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1957&r=upt |
| By: | Marcus Pivato; Philippe Mongin (Université de Cergy-Pontoise, THEMA; Centre National de la Recherche Scientique and HEC Paris) |
| Abstract: | We introduce a ranking of multidimensional alternatives, including un- certain prospects as a particular case, when these objects can be given a matrix form. This ranking is separable in terms of rows and columns, and continuous and monotonic in the basic quantities. Owing to the theory of additive separability developed here, we derive very precise numerical representations over a large class of domains (i.e., typically not of the Cartesian product form). We apply these representation to (1) streams of commodity baskets through time, (2) uncertain social prospects, (3) un- certain individual prospects. Concerning (1), we propose a finite horizon variant of Koopmans's (1960) axiomatization of infinite discounted util- ity sums. The main results concern (2). We push the classic comparison between the ex ante and ex post social welfare criteria one step further by avoiding any expected utility assumptions, and as a consequence ob- tain what appears to be the strongest existing form of Harsanyi's (1955) Aggregation Theorem. Concerning (3), we derive a subjective probability for Anscombe and Aumann's (1963) finite case by merely assuming that there are two epistemically independent sources of uncertainty. characteristics. |
| Keywords: | Multiattribute utility, Separability, Subjective Probability, Harsanyi, Koopmans, Ex ante versus ex post welfare. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2014-15&r=upt |
| By: | Charles Yuji Horioka (School of Economics, University of the Philippines Diliman) |
| Abstract: | This paper provides an introduction to the field of evolutionary economics with emphasis on the evolutionary theory of household behavior. It shows that the goal of evolutionary economics is to improve upon neoclassical economics by incorporating more realistic and empirically grounded behavioral assumptions and technological innovation and that the goal of the evolutionary theory of household behavior is to improve upon the neoclassical theory of household behavior by replacing the neoclassical assumption of selfish utility maximization with bounded rationality and satisficing and by incorporating the reaction of households to the introduction of new goods and services. The paper concludes with a brief discussion of loss aversion and self-interest vs. altruism. |
| Keywords: | Altruism, altruistic bequest motive, behavioral assumptions, behavioral economics, bequest motives, bounded rationality, consumption behavior, creative destruction, destructive technologies, dynastic bequest motive, evolution, evolutionary economics |
| JEL: | A12 B15 B25 B52 D11 D91 E21 O31 O33 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:phs:dpaper:201412&r=upt |
| By: | Mikel Pérez-Nievas; J. Ignacio Conde-Ruiz; Eduardo L. Giménez |
| Abstract: | This paper explores the properties of several notions of efficiency (A−efficiency, P−efficiency and Millian efficiency) to evaluate allocations in a general overlapping generations setting with endogenous fertility and descendant altruism that includes, as a particular case, Barro and Becker’s (1988) model of fertility choice. We first focus on the notion of A−efficiency, proposed by Golosov, Jones and Tertilt (Econometrica, 2007) and show that, in many environments, the set of symmetric, interior, A−efficient allocations is empty. To overcome this problem, we then propose to evaluate the efficiency of a given allocation with a particular specification of P−efficiency –proposed also by Golosov et al.– for which the utility attributed to the unborn depends on the utility level achieved by those who get to be born in a given allocation. For a large class of specifications of the function determining the utility attributed to the unborn, every Millian efficient allocation, that is, every symmetric allocation that is not A−dominated by any other symmetric allocation, is also P-efficient. Finally, we restate the First Welfare Theorem by showing that a) every competitive equilibrium is a –statically– Millian efficient allocation; and that b) if long-run wages do not exceed the capitalized costs of rearing children, then competitive equilibria are also –dynamically– Millian efficient. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2014-10&r=upt |
| By: | Frederik Herzberg (Center for Mathematical Economics, Bielefeld University); Geghard Bedrosian (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | This paper builds on a recent proposal for microeconomic foundations for "representative agents". Herzberg [Journal of Mathematical Economics, vol. 46, no. 6, 1115-1124 (2010)] constructed a representative utility function for infinite-dimensional social decision problems and since the decision problems of macroeconomic theory are typically infinite-dimensional, Herzberg's original result is insufficient for many applications. We therefore generalise his result by allowing the social alternatives to belong to a general reflexive Banach space and provide sufficient conditions for our new results to be satisfied in economic applications. |
| Keywords: | microfoundation, representative agent, social choice, reflexive Banach space, convex optimisation, ultrafilter, bounded ultrapower, nonstandard analysis |
| JEL: | D71 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:514&r=upt |
| By: | Hiroki Nishimura (Department of Economics, University of California Riverside); Efe A. Ok (New York University); John K.-H. Quah (Oxford University) |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201418&r=upt |
| By: | Carmen Camacho (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | We develop a model economy adapting Hotelling's migration law to make individuals react to the gradient of their indirect utility. In a first version, individuals respond uniquely to utility differences. In a second phase, we insert our migration law as a dynamic constraint in a spatial model of economic growth in which a policy maker maximizes overall welfare. In both cases we prove the existence of a unique solution under certain assumptions and for each initial distribution of human capital. We illustrate some extremely interesting properties of the economy and the associated population dynamics through numerical simulations. In the decentralized case in which a region enjoys a temporal technological advantage, an agglomeration in human capital emerges in the central area, which does not coincide with the technologically advanced area. In the complete model, initial differences in human capital can trigger everlasting inequalities in physical capital. |
| Keywords: | Migration; spatial dynamics; economic growth; parabolic PDE; optimal control |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00801109&r=upt |
| By: | Chen, Andrew Y. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Many theories of asset prices assume time-varying uncertainty in order to generate time-varying risk premia. This paper generates time-varying uncertainty endogenously, through precautionary saving dynamics. Precautionary motives prescribe that, in bad times, next period's consumption should be very sensitive to news. This time-varying sensitivity results in time-varying consumption volatility. Production makes this channel visible, and external habit preferences amplify it. An estimated model featuring this channel quantitatively accounts for excess return and dividend predictability regressions. It also matches the first two moments of excess equity returns, the risk-free rate, and the second moments of consumption, output, and investment. |
| Keywords: | Time-varying risk premia; the equity premium puzzle; time-varying volatility; habit; precautionary savings |
| Date: | 2014–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-59&r=upt |
| By: | Alexander Mayer-Gohde; ; ; |
| Abstract: | I construct risk-corrected approximations of the policy functions of DSGEmodels around the stochastic steady state and ergodic mean that are linear in the state variables. The resulting approximations are uniformly more accurate than standard linear approximations and capture the dynamics of asset pricing variables such as the expected risk premium missed by standard linear approximations. The algorithm is fast and reliable, requiring only the solution of linear equations using standard perturbation output. I examine the joint macroeconomic and asset pricing implications of a real business cycle model with stochastic trends and recursive preferences. The method is able to estimate risk aversion under these preferences using the Kalman filter, where a standard linear approximation provides no information and alternative methods require computationally intensive particle filters subject to sampling variation. |
| Keywords: | DSGE; Solution methods; Ergodic mean; Stochastic steady state; Perturbation |
| JEL: | C61 C63 E17 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2014-034&r=upt |