|
on Utility Models and Prospect Theory |
| By: | Loïc Berger (Fondazione Eni Enrico Mattei (FEEM) and Euro-Mediterranean Center on Climate Change (CMCC)) |
| Abstract: | Most decisions concerning (self-)insurance and self-protection have to be taken in situations in which a) the effort exerted precedes the moment uncertainty realises, and b) the probabilities of future states of the world are not perfectly known. By integrating these two characteristics in a simple theoretical framework, this paper derives plausible conditions under which ambiguity aversion raises the demand for (self-)insurance and self-protection. In particular, it is shown that in most usual situations where the level of ambiguity does not increase with the level of effort, a simple condition of ambiguity prudence known as decreasing absolute ambiguity aversion (DAAA) is sufficient to give a clear and positive answer to the question: Does ambiguity aversion raise the optimal level of effort? |
| Keywords: | Non-expected Utility, Self-protection, Self-insurance, Ambiguity Prudence |
| JEL: | D61 D81 D91 G11 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2015.15&r=upt |
| By: | Sara le Roux (Department of Economics, Oxford Brookes University); David Kelsey (Department of Economics, University of Exeter) |
| Abstract: | This paper studies the impact of ambiguity in the best shot and weakest link models of public good provision. The models are ?rst analysed theoretically. Then we conduct experiments to study how ambiguity affects behaviour in these games. We test whether subjects? perception of ambiguity differs between a local opponent and a foreign one. We fi?nd that an ambiguity safe strategy, is often chosen by subjects. This is compatible with the hypothesis that ambiguity aversion infl?uences behaviour in games. Subjects tend to choose contributions above (resp. below) the Nash equilibrium in the Best Shot (resp. Weakest Link) model. |
| Keywords: | Public goods; Ambiguity; Choquet expected utility; strategic complements; weakest link; best shot. |
| JEL: | C72 C91 D03 D81 H41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1506&r=upt |
| By: | Hermann, Daniel; Mußhoff, Oliver; Rüther, Dörte |
| Abstract: | The discount rate is of great importance for all decisions in an intertemporal context, such as the decision of how much a society invests in environmental preservation, or the financial decisionmaking on the individual level. This study experimentally investigates the time preferences of farmers by comparing two different methods: One method is based on the measurement of time preference and risk attitude that are elicited in two parts of an experiment. Afterwards, the discount rate is adjusted using the risk attitude. The other method uses a one-parameter approach without the necessity of separately eliciting the individual risk attitude and without an assumption regarding the form of the utility function. The results reveal that, contrary to previous research, the ascertained discount rates of both methods are different. Furthermore, only the method based on the measurement of time preference and risk attitude separately reveals sensitivities regarding the prospective payout. |
| Keywords: | discount rate,experimental economics,intertemporal decision making,magnitude effect,risk attitude |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:daredp:1506&r=upt |
| By: | Eftichios S. Sartzetakis (University of Macedonia, Department of Economics); Anastasios Xepapadeas (Athens University of Economics and Business and Beijer Fellow); Athanasios Yannacopoulos (Athens University of Economics and Business) |
| Abstract: | Taking as given that we are consuming too much and that overconsumption leads to environmental degradation, the present paper examines the regulator's choices between informative advertisement and consumption taxation. We model overconsumption by considering individuals that care about social status apart from the intrinsic utility, derived from direct consumption. We assume that there also exist individuals that care only about their own private consumption and we examine the evolution of preferences through time by allowing individuals to alter their behavior as a result of a learning process, akin to a replicator dynamics type. We consider the regulator's choice of consumption taxation and informative advertisement both in an arbitrary and an optimal control context. In the arbitrary overconsumption control context we find that the regulator could decrease, or even eliminate, the share of status seekers in the population. In the context of optimal overconsumption control, we show that the highest welfare is attained when status seekers are completely eliminated, while the lowest in the case that the entire population consists of status seekers. |
| Keywords: | Status-seaking, Replicator Dynamics, Information Provision, Environmental Taxation |
| JEL: | Q53 Q58 D62 D82 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2015.34&r=upt |
| By: | Christopher Boyce (University of Stirling); Mikolaj Czajkowski (University of Warsaw); Nick Hanley (University of St Andrews); Charles Noussair (Tilburg University); Michael Townsend (NZ National Institute for Water and Atmosphere); Steve Tucker (University of Waikato) |
| Abstract: | This paper tests whether changes in 'incidental emotions' lead to changes in economic choices. Incidental emotions are experienced at the time of an economic decision but are not part of the payoff from a particular choice. As such, the standard economic model predicts that incidental emotions should not affect behavior, yet many papers in the behavioral science and psychology literatures find evidence of such effects. In this paper, we used a standard procedure to induce different incidental emotional states in respondents, and then carried out a choice experiment on changes to an environmental good (beach quality). We estimated preferences for this environmental good and willingness to pay for changes in this good, and tested whether these were dependent on the particular emotional state induced. We also tested whether choices became more or less random when emotional states were induced, based on the notion of randomness in a standard random utility model. Contrary to our a-priori hypothesis we found no significant evidence of treatment effects, implying that economists need not worry about the effects of variations in incidental emotions on preferences and the randomness of choice, even when there is measured (induced) variation in these emotions. |
| Keywords: | choice experiments; behavioral economics; ecosystem services; emotions; rationality |
| JEL: | Q51 Q57 D03 D87 |
| Date: | 2015–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:wai:econwp:15/02&r=upt |
| By: | Bell, Peter N |
| Abstract: | Consider an agent who holds a stock, but is allowed to buy and hold some quantity of at-the-money put options on the stock. Such an agent must decide the optimal use of financial derivatives under trade restrictions. This paper uses simulation to compare the optimal quantity when the agent maximizes mean-variance utility or Value at Risk over wealth at option expiry. The optimal quantity is larger than the stock holding under mean-variance utility and precisely the same under value at risk. The options do not remove all variation in returns but still benefit the agent. |
| Keywords: | Portfolio optimization; put option; trade restrictions; simulation. |
| JEL: | C00 C15 C63 G11 G22 |
| Date: | 2014–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62155&r=upt |
| By: | Tamas Solymosi (Momentum Game Theory Research Group, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Balazs Sziklai (Momentum Game Theory Research Group, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences) |
| Abstract: | We provide a new modus operandi for the computation of the nucleolus in cooperative games with transferable utility. Using the concept of dual game we extend the theory of characterization sets. Dually essential and dually saturated coalitions determine both the core and the nucleolus in monotonic games whenever the core is non-empty. We show how these two sets are related with the existing characterization sets. In particular we prove that if the grand coalition is vital then the intersection of essential and dually essential coalitions forms a characterization set itself. We conclude with a sample computation of the nucleolus of bankruptcy games - the shortest of its kind. |
| Keywords: | Cooperative game theory, Nucleolus, Characterization sets |
| JEL: | C71 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1512&r=upt |
| By: | Francisco J. Bahamonde-Birke; Uwe Kunert; Heike Link; Juan de Dios Ortúzar |
| Abstract: | We provide an in-depth theoretical discussion about the differences between attitudes and perceptions, as well as an empirical exercise to analyze its effects. This discussion is of importance, as the large majority of papers considering attitudinal latent variables, just consider those as attributes affecting directly the utility of a certain alternative while systematic taste variations are rarely taken into account and perceptions are normally completely ignored. The results of our case study show that perceptions may indeed affect the decision making process and that they are able to capture a significant part of the variability that is normally explained by alternative specific constants. In the same line, our results indicate that attitudes may be a reason for systematic taste variations, and that a proper categorization of the latent variables, in accordance with the underlying theory, may outperform the customary assumption of linearity. |
| Keywords: | Hybrid Discrete Choice Modelling, Latent Variables, Attitudes, Perceptions |
| JEL: | C50 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1474&r=upt |
| By: | Paolo Falbo (Department of Economics and Management, University of Brescia); Juri Hinz (School of Mathematical Sciences, UTS Business School, University of Technology, Sydney); Cristian Pelizzari (Department of Economics and Management, University of Brescia) |
| Abstract: | According to theoretical arguments, a properly designed emission trading system should help reaching pollution reduction at low social burden. Based on the theoretical work of environmental economists, cap-and-trade systems are put into operations all over the world. However, the practice from emissions trading yields a real stress test for the underlying theory and reveals a number of its weak points. This paper aims to fill the gap between general welfare concepts underlying understanding of liberalized market and speci?c issues of real-world emission market operation. In our work, we present a novel technique to analyze emission market equilibrium in order to address diverse questions in the setting of risk-averse market players. Our contribution signi?cantly upgrades all existing models in this ?eld, which neglect risk-aversion aspects at the cost of having a wide range of singularities in their conclusions, now resolved in our approach. Furthermore, we show how the architecture of an environmental market can be optimized under the realistic assumption of risk-aversion and which approximations must be met therefore. |
| Keywords: | emission trading; environmental ?nance;, market equilibrium |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:359&r=upt |