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on Utility Models and Prospect Theory |
| By: | Florent Buisson (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | I show that a loss averse consumer who must share her budget between two goods prefer allocations for which consumption equals reference point for at least one good. The phenomenon intensity depends on the curvature of the utility curve. These results are consistent with several stylized facts which cannot be explained by the standard consumer theory. |
| Keywords: | Loss aversion; prospect theory |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00820722&r=upt |
| By: | Rose-Anne Dana (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine, IPAG Business School - Ipag Business School); Cuong Le Van (IPAG Business School - Ipag Business School, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment) |
| 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 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01020646&r=upt |
| By: | Antoine Bommier (Chair for Integrative Risk Management and Economics - ETH Zurich); Bruno Lanz (Center for International Environmental Studies - Graduate Institute Geneva); Stéphane Zuber (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We study the role of alternative intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast the traditional "discounted utility" model, which assumes risk neutrality with respect to intertemporal utility, with a multiplicative choice model that displays risk aversion in that dimension. First, we show that both representations of preferences can rationalize the same "business as usual" economy for a given interest rate and no pollution externality. Second, once we introduce a collapse risk whose hazard rate is a function of the pollution stock, multiplicative preferences recommend a much more stringent policy response. An illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect, in terms of policy recommendations, as scaling up the schedule of the hazard rate by a factor of 100. |
| Keywords: | Environmental policy; climate change; catastrophic risks; risk aversion; discounting |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00973491&r=upt |
| By: | Fleurbaey, Marc; Zuber, Stéphane |
| Abstract: | Discounted utilitarianism and the Ramsey equation prevail in the debate on the discount rate on consumption. The utility discount rate is assumed to be constant and to reflect either the uncertainty about the existence of future generations or a pure preference for the present. The authors question the unique status of discounted utilitarianism and discuss the implications of alternative criteria addressing the key issues of equity in risky situations and variable population. To do so, they introduce a class of intertemporal social objectives, named Expected Prioritarian Equally Distributed Equivalent (EPEDE) criteria. The class is more flexible than Discounted utilitarianism in terms of population ethics and it disentangles risk aversion and inequality aversion. The authors show that these social objectives imply interesting modifications of the Ramsey formula, and shed new light on Weitzman's "dismal theorem". |
| Keywords: | discounted utilitarianism,social discounting |
| JEL: | D63 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201440&r=upt |
| By: | Peterson, Hikaru; Yamaura, Koichi |
| Keywords: | Food safety, Japan, ambiguity aversion, loss aversion, nuclear disaster, Food Consumption/Nutrition/Food Safety, D12, Q10, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:170552&r=upt |
| By: | Love, Abby; Magnan, Nicholas; Colson, Gregory J. |
| Abstract: | Risk is pervasive in developing country agriculture, and risk preferences are though to impact seed and technology choice. Empirical research on risk preferences and technology adoption typically only consider the risk preferences of a single household member. In this paper experimental techniques based on prospect theory (PT) to elicit risk aversion, loss aversion, and nonlinear probability weighting parameters from husbands and wives in Kenyan agricultural households. We also use survey data about their maize seed choice from these same respondents. We find that all three PT parameters are significant in different model specifications, and that risk preferences affect adoption differently for men and women in the same households, and also differently in the eastern and western regions of the country. |
| Keywords: | Crop Production/Industries, Farm Management, Research and Development/Tech Change/Emerging Technologies, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:170241&r=upt |
| By: | Duangbootsee, Uchook; Myers, Robert J. |
| Keywords: | price support program, deficiency payment program, stochastic efficiency with respect to a function (SERF), certainty equivalent, risk aversion, Agricultural and Food Policy, International Development, Risk and Uncertainty, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:170433&r=upt |
| By: | Rania Hentati Kaffel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Jean-Luc Prigent (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise) |
| Abstract: | The recent financial crisis has highlighted the necessity to introduce mixtures of probability distributions in order to improve the estimation of asset returns and in particular to better take account of risks. Since Pearson (1894), these mixtures have been intensively used in many scientific fields since they provide very convenient mathematical tools to examine various statistical data and to approximate many probability distributions. They are typically introduced to model the choice of probability distributions among a given parametric family. The coefficients of the mixture usually correspond to the relative frequencies of each possible parameter. In this framework, we examine the single-period portfolio choice model, which has been addressed in the partial equilibrium framework, by Brennan and Solanki (1981), Leland (1980) and Prigent (2006). We consider an investor who wants to maximize the expected utility of the value of his portfolio consisting of one risk-free asset and one risky asset. We provide and analyze the solution for log return with mixture distributions, in particular for the mixture Gaussian case. The optimal portfolio is characterized for arbitrary utility functions. Our results show that mixture of distributions can have significant implications on the portfolio management. |
| Keywords: | Portfolio optimization; Mixture probability distributions |
| Date: | 2014–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01066105&r=upt |
| By: | Bazovkin, Pavel |
| Abstract: | We consider a vector-valued multivariate risk measure that depends on the user's profile given by the user's utility. It is constructed on the basis of weighted-mean trimmed regions and represents the solution of an optimization problem. The key feature of this measure is convexity. We apply the measure to the portfolio selection problem, employing different measures of performance as objective functions in a common geometrical framework. |
| Keywords: | Multivariate risk measure,robust portfolio optimization,weighted-mean trimmed regions,data central regions,convex risk measure,distortion risk measure |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ucdpse:0114&r=upt |
| By: | Luigi Guiso (EIEF and CEPR) |
| Abstract: | It has long been recognized that variations in expected future cash flows are not enough to account for variations in asset prices. Variation in willingness to bear risk is also needed. Asset pricing theories have accordingly focused on models characterized by preferences that allow for time variation in risk aversion. But what drives this variation? How should preferences be characterized? Do risk attitudes of individuals evolve over time? And if so, what are the triggers of these variations? This chapter will discuss these issues, summarizing what we know about individual preferences for risk and motives for them to change over time. It will also provide some evidence on how these preferences changed during the financial crises. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1412&r=upt |
| By: | Keita Kinjo (Department of Economics, Okinawa International Univeristy); Shinya Sugawara (Faculty of Economics, The University of Tokyo) |
| Abstract: | This article empirically analyzes consumer behavior of watching TV dramas via case-based decision theory. This theory models consumer decision under uncertainty in product quality, based on subjective evaluations of previous purchases for similar goods. Our empirical analysis is concerned with <i>getsuku</i>, the Japanese TV dramas broadcasted at 9pm Monday by the Fuji Television Network, whose quality necessarily has uncertainty because no program is completely equivalent to any other. Owing to the regularity of the schedule and the long-sustained popularity of the program that enables us to be able to collect consumer data easily, we conduct a web survey of individual audiences on subjective evaluations of previously watched dramas. Our empirical analysis demonstrates better performance by the case-based models regarding both statistical model selection and one-step-ahead prediction than traditional utility-based models. We also reveal that the good performance of the case-based model in our analysis depends on the availability of individual subjective evaluations and that it is difficult to replace the individual-specific information by demographic information and aggregate data. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2014cf940&r=upt |
| By: | Robert Kollmann |
| Abstract: | Standard macro models cannot explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle. I show that this result is highly sensitive to the structure of financial markets. When just a bond is traded internationally, then long-run risk generates insufficient exchange rate volatility. A long-run risk model with recursive-preferences can generate realistic exchange rate volatility, if all agents efficiently share their consumption risk by trading in complete financial markets; however, this entails massive international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursivepreferences model in which only a fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, can generate realistic exchange rate and external balance volatility. |
| Keywords: | exchange rate, long-run risk, recursive preferences, complete financial markets, financial frictions, international risk sharing |
| JEL: | F31 F36 F41 F43 F44 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-70&r=upt |
| By: | Nicolas Jacquemet (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université de Strasbourg - Université Nancy II); Adam Zylbersztejn (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | Experiments based on the Beard and Beil (1994) two-player coordination game robustly show that coordination failures arise as a result of two puzzling behaviors: (i) subjects are not willing to rely on others' self-interested maximization, and (ii) self-interested maximization is not ubiquitous. Such behavior is often considered to challenge the relevance of subgame perfectness as an equilibrium selection criterion, since weakly dominated strategies are actually used. We report on new experiments investigating whether inequality in payoffs between players, maintained in most lab implementations of this game, drives such behavior. Our data clearly show that the failure to maximize personal payoffs, as well as the fear that others might act this way, do not stem from inequality aversion. This result is robust to varying the saliency of decisions, repetition-based learning and cultural differences between France and Poland. |
| Keywords: | Coordination Failure ; Subgame perfectness ; Non-credible threats; Laboratory experiments; Social Preferences; Inequality Aversion |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01026080&r=upt |
| By: | Carla Canelas (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); François Gardes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Silvia Salazar (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | In this article, we propose a new method to estimate price effects on micro cross-sectional data using full prices that take into account household domestic production. We use behavioral microsimulations by subpopulations to analyze the redistributive impact of changes on Value Added Tax (VAT) rates in Ecuador and Guatemala. Utility analysis is used to evaluate the consequences on households welfare caused by these tax reforms. The proposed model solves the crucial problem of price data availability in developing countries. The estimates of the full price elasticities highlight the importance of the substitution between time and monetary expenditures within the households domestic production function and show that traditional approaches only tell half of the story. In general, the utility estimates seem to be consistent as they have the expected sign and follow the same pattern of changes in consumption. |
| Keywords: | Consumer demand; full prices; microsimulation; taxes; time-use; welfare |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00881014&r=upt |
| By: | Carola Kniebes; Katrin Rehdanz; Ulrich Schmidt |
| Abstract: | This paper establishes a new method for eliciting Willingness to Pay (WTP) in contingent valuation (CV) studies with an open-ended elicitation format: the Range-WTP method. In contrast to the traditional approach for eliciting Point-WTP, Range-WTP explicitly allows for preference uncertainty in responses. Using data from two novel large-scale surveys on the perception of solar radiation management (SRM), a little-known technique for counteracting climate change, we compare the performance of both methods in the field. In doing so, we use the criterion of theoretical validity and measure the degree to which WTP values are consistent with theoretical expectations. In addition, we analyse the test-retest reliability and stability of our results over time. Our evidence suggests that the Range-WTP method clearly outperforms the Point-WTP method |
| Keywords: | contingent valuation, willingness to pay, valuation uncertainty, willingness-to-pay range, open-ended elicitation, reliability, validity, preference uncertainty |
| JEL: | Q51 Q53 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1972&r=upt |
| By: | Peter Arcidiacono; V. Joseph Hotz; Arnaud Maurel; Teresa Romano |
| Abstract: | We show that data on subjective expectations, especially on outcomes from counterfactual choices and choice probabilities, are a powerful tool in recovering ex ante treatment effects as well as preferences for different treatments. In this paper we focus on the choice of occupation, and use elicited beliefs from a sample of male undergraduates at Duke University. By asking individuals about potential earnings associated with counterfactual choices of college majors and occupations, we can recover the distribution of the ex ante monetary returns to particular occupations, and how these returns vary across majors. We then propose a model of occupational choice which allows us to link subjective data on earnings and choice probabilities with the non-pecuniary preferences for each occupation. We find large differences in expected earnings across occupations, and substantial heterogeneity across individuals in the corresponding ex ante returns. However, while sorting across occupations is partly driven by the ex ante monetary returns, non-monetary factors play a key role in this decision. Finally, our results point to the existence of sizable complementarities between college major and occupations, both in terms of earnings and non-monetary benefits. |
| JEL: | C31 I23 J24 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20626&r=upt |