nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒06‒05
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Is Prelec’s function discontinuous at p = 1? (for the Einhorn Award of SJDM) By Harin, Alexander
  2. Uncertainty Aversion, Multi Utility Representations and State Independence of Utility By Hill, Brian
  3. Aggregating Tastes, Beliefs, and Attitudes under Uncertainty By Eric Danan; Thibault Gajdos; Brian Hill; Jean-Marc Tallon
  4. Ambiguity Preferences and Portfolio Choices: Evidence from the Field By Milo Bianchi; Jean-Marc Tallon
  5. Portfolio Optimization within Mixture of Distributions By Rania Hentati Kaffel; Jean-Luc Prigent

  1. By: Harin, Alexander
    Abstract: A possibility of the existence of a discontinuity of Prelec’s (probability weighting) function at the probability p = 1 is discussed. This possibility is supported by the purely mathematical theorems and the “certain–uncertain” inconsistency of the random–lottery incentive experiments. The results of the well-known experiment support it as well.
    Keywords: Prelec; utility; prospect theory; probability weighting function; Luce;
    JEL: C0 C02 C1 C8 C9 C91 C93 D01 D8 D81 G02 G11
    Date: 2015–05–28
  2. By: Hill, Brian
    Abstract: This paper proposes and characterises a model of uncertainty averse preferences that can simultaneously accommodate three divergences from subjective expected utility: imprecision of beliefs (or ambiguity), imprecision of tastes (or multi utility), and state dependence of utility. Moreover, it characterises, in this context, a notion of state independence of utility borrowed from the literature on incomplete preferences. This notion is then shown to be basically inconsistent with the standard state-independence axiom, monotonicity, whenever tastes are imprecise. A new notion of state independence in the context of imprecise tastes, which is characterised by monotonicity, is proposed.
    Keywords: State independence of utility; imprecise tastes; uncertainty aversion; multi utility; multiple priors; state-dependent utility
    JEL: D81
    Date: 2015–01–22
  3. By: Eric Danan (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS); Thibault Gajdos (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université); Brian Hill (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - CNRS - GROUPE HEC); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: We provide possibility results on the aggregation of beliefs and tastes for Monotone, Bernoullian and Archimedian preferences of Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci and Siniscalchi (2011). We propose a new axiom, Unambiguous Pareto Dominance, which requires that if the unambiguous part of individuals' preferences over a pair of acts agree, then society should follow them. We characterize the resulting social preferences and show that it is enough that individuals share a prior to allow non dictatorial aggregation. A further weakening of this axiom on common-taste acts, where cardinal preferences are identical, is also characterized. It gives rise to a set of relevant priors at the social level that can be any subset of the convex hull of the individuals' sets of relevant priors. We then apply these general results to the Maxmin Expected Utility model, the Choquet Expected Utility model and the Smooth Ambiguity model. We end with a characterization of the aggregation of ambiguity attitudes.
    Date: 2014–07
  4. By: Milo Bianchi (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: We investigate the empirical relation between ambiguity aversion, risk aversion and portfolio choices. We match administrative panel data on portfolio choices with survey data on preferences over ambiguity and risk. We report three main findings. First, conditional on participation, ambiguity averse investors hold riskier portfolios. Second, they rebalance their portfolio in a contrarian direction relative to the market. Accordingly, their exposure to risk is more stable over time. Third, their portfolios experience higher returns, but they are also more sensitive to market trends. In several instances, the effects of ambiguity aversion stand in sharp contrast with those of risk aversion.
    Date: 2014–09
  5. By: Rania Hentati Kaffel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Jean-Luc Prigent (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS)
    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.
    Date: 2014–09–19

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