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on Utility Models and Prospect Theory |
| By: | Kim Weston |
| Abstract: | Stability of the utility maximization problem with random endowment and indifference prices is studied for a sequence of financial markets in an incomplete Brownian setting. Our novelty lies in the nonequivalence of markets, in which the volatility of asset prices (as well as the drift) varies. Degeneracies arise from the presence of nonequivalence. In the positive real line utility framework, a counterexample is presented showing that the expected utility maximization problem can be unstable. A positive stability result is proven for utility functions on the entire real line. |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1410.0915&r=upt |
| By: | Uli KLEINWECHTER |
| URL: | http://d.repec.org/n?u=RePEc:ekd:002596:259600093&r=upt |
| By: | Jose Apesteguia; Miguel A. Ballester |
| Abstract: | Discrete choice methods are often used for the estimation of time preferences. We show that these methods have pervasive problems when based on random utility models, for which cases our results establish that the probability of selecting a later option over an earlier one may be greater for higher levels of impatience. This could have profound implications, not only in the experimental estimation of time preferences, but also in a wide variety of empirical papers using such models in dynamic settings. Alternatively, we also show that discrete choice methods built on random preference models are always free of all such problems. |
| Keywords: | Discrete Choice; Structural Estimation; Time; Discounting; Random Utility Models; Random Preference Models. |
| JEL: | C25 D90 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1442&r=upt |
| By: | David Greasley (School of History, Classics and Archaeology, University of Edinburgh); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Eoin McLaughlin (School of Geography and Sustainable Development, University of St. Andrews); Les Oxley (Department of Economics, University of Waikato) |
| Abstract: | Modern macroeconomic theory utilises optimal control techniques to model the maximisation of individual well-being using a lifetime utility function. Agents face choices over current and future consumption (with resultant implied savings decisions) seeking to maximise the present value of current plus future well-being. However, such inter-temporal welfare- maximising assumptions remain empirically untested. In the work presented here we test whether welfare was in (historical) fact maximised in the US between 1870 -2000 and find empirical support for the optimising basis of growth theory, but only once a comprehensive view of what constitutes a country’s wealth or capital is taken into account. |
| Keywords: | inter-temporal utility maximisation;modern growth theory; US; comprehensive wealth |
| JEL: | E21 E22 C61 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:201401&r=upt |
| By: | Pascal Michaillat (Centre for Macroeconomics (CFM); Economics Department London School of Economics (LSE)); Emmanuel Saez (Department of Economics University of California-Berkeley) |
| Abstract: | In recent decades, advanced economies have experienced low and stable inflation and long periods of liquidity trap. We construct an alternative business-cycle model capturing these two features by adding two assumptions to a money-in-the-utility-function model: the labor market is subject to matching frictions, and real wealth enters the utility function. These assumptions modify the two core equations of the standard New Keynesian model. With matching frictions, we can analyze equilibria in which inflation is fixed and not determined by a forward-looking Phillips curve. With wealth in the utility, the Euler equation is modified and we can obtain steady-state equilibria with a liquidity trap, positive inflation, and labor market slack. The model is simple enough to inspect the mechanisms behind cyclical fluctuations and to study the effects of conventional and unconventional monetary and fiscal policies. As a byproduct, the model provides microfoundations for the classical IS-LM model. Finally, we show how directed search can be combined with costly price adjustments to generate a forward-looking Phillips curve and recover some insights from the New Keynesian model. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1425&r=upt |
| By: | Ekaterina E. Kuzmicheva (National Research University Higher School) |
| Abstract: | This paper presents evidence of the combined effect of financial constraints and attitudes towards risk in corporate investment. Using panel data on public companies functioning in developed countries, the author shows that demand uncertainty provokes a firm with limited resources to invest sub-optimally, compared to an unconstrained company. Also, with a given level of financial constraints, risk-taking companies tend to decrease investment to a lesser extent in comparison with risk-averse companies. To show this, an index of financial constraints has been constructed, and the optimal threshold values of the index and the risk aversion coefficient have been found. |
| Keywords: | investment decisions; index of financial constraints; attitude towards risk, demand uncertainty. |
| JEL: | C12 C23 C24 D22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:36/fe/2014&r=upt |
| By: | A.Chateauneuf; G.Lakhnati |
| Abstract: | In this paper, we examine the eect of a decrease in risk on the demand for risky asset in the standard portfolio problem. We introduce a new class of dominance, that we name relative order and we prove that this class of dominance is consistent both with central dominance introduced by Gollier (1995) and with mean preserving in- crease in risk. Finally, we show that some known classes of dominance are particular cases of our new class of dominance. |
| Keywords: | Central Dominance, EU Model, Mean Preserving Increase in Risk, Port- folio Choice, Relative Simple Dominance, Relative Dominance. |
| JEL: | D80 D81 |
| Date: | 2014–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-600&r=upt |
| By: | Scott Robertson; Konstantinos Spiliopoulos |
| Abstract: | We study utility indifference prices and optimal purchasing quantities for a non-traded contingent claim in an incomplete semi-martingale market with vanishing hedging errors, making connections with the theory of large deviations. We concentrate on sequences of semi-complete markets where for each $n$ the claim $h_n$ admits the decomposition $h_n = D_n+Y_n$ where $D_n$ is replicable and $Y_n$ is completely unhedgeable in that the indifference price of $Y_n$ for an exponential investor is its certainty equivalent. Under broad conditions, we may assume that $Y_n$ vanishes in accordance with a large deviations principle as $n$ grows. In this setting, we identify limiting indifference prices as the position size becomes large, and show the prices typically are not the unique arbitrage free price in the limiting market. Furthermore, we show that optimal purchase quantities occur at the large deviations scaling, and hence large positions endogenously arise in this setting. |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1410.0384&r=upt |
| By: | Mikołaj Czajkowski (Faculty of Economic Sciences, University of Warsaw); Anna Bartczak (Faculty of Economic Sciences, University of Warsaw; Warsaw Ecological Economics Center); Wiktor Budziński (Faculty of Economic Sciences, University of Warsaw); Marek Giergiczny (Faculty of Economic Sciences, University of Warsaw; Warsaw Ecological Economics Center) |
| Abstract: | The assumption of the stability of preferences is a fundamental one in the theory of the consumer. Many papers within the stated preferences literature have tested this assumption, and have found mixed results. Individuals may become more sure of their preferences as they repeat a valuation task or purchase decision; they may also learn more about prices and quantities of substitutes or complements over time, or about other relevant characteristics of both the good being valued and alternatives in their choice sets. In this paper, we test for the stability of preferences and willingness to pay for attributes of forest management both within and between samples. The within-sample test compares a set of responses from individuals over the sequence of a survey; the between-sample test compares responses from the same people over a period of 6 months. We find that respondents’ preferences differ more within a sample (comparing their first 12 with their second 12 choices) than across samples. This may imply that preference learning and/or fatigue effects within choice experiments are more important than changes in preferences over time in this data. |
| Keywords: | preference stability, test-retest, discrete choice experiments, contingent valuation, stated preferences, forestry |
| JEL: | D01 H4 Q23 Q51 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2014-24&r=upt |
| By: | Stephen Pratt; Adam Blake |
| URL: | http://d.repec.org/n?u=RePEc:ekd:000239:23900070&r=upt |