
on Utility Models and Prospect Theory 
By:  Ian DewBecker (Northwestern University); Rhys Bidder (Federal Reserve Bank of San Francisco) 
Abstract:  We study an investor who is unsure of the dynamics of the economy. Not only are parameters unknown, but the investor does not even know what order model to estimate. She estimates her consumption process nonparametrically and prices assets using a pessimistic model that minimizes lifetime utility subject to a constraint on statistical plausibility. The equilibrium is exactly solvable and we show that the pricing model always includes long run risks. With a single free parameter determining risk preferences, the model generates high and volatile risk premia, excess volatility in stock returns, return predictability, interest rates that are uncorrelated with expected consumption growth, and investor expectations that are consistent with survey evidence. Risk aversion is equal to 4.8, there is no stochastic volatility or disasters, and the pricing model is statistically nearly indistinguishable from the true datagenerating process. The analysis yields a general characterization of behavior under a very broad form of model uncertainty. 
Date:  2015 
URL:  http://d.repec.org/n?u=RePEc:red:sed015:490&r=upt 
By:  André De Palma (ENS Cachan  École normale supérieure  Cachan, Department of Economics, Ecole Polytechnique  CNRS  Polytechnique  X); Karim Kilani (LIRSA CNAM  ISC Paris Business School  ISC Paris Business School, IEMN  Institut d'électronique, de microélectronique et de nanotechnologie  CNRS  Institut supérieur de l'électronique et du nunérique (ISEN)  Université de Valenciennes et du HainautCambresis  Université Lille 1  Sciences et technologies) 
Abstract:  We prove a general identity which states that any element of a tuple (ordered set) can be obtained as an alternating binomial weighted sum of rst elements of some subtuples. The identity is then applied within the random utility models framework where any alternative's ordered choice probability (the probability that it has a given rank) is expressed with respect to standard best choice probabilities. The logit and the logsum formulas are extended to their ordered choice counterparts. In a symmetric case, we compare for the probit and the logit, the surplus loss due to the withdrawal of a product with the damage due to the loss of a rank. 
Date:  2015–03–12 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal01130603&r=upt 
By:  François Legendre (TEPP  Travail, Emploi et Politiques Publiques  UPEM  Université ParisEst MarnelaVallée  CNRS, ERUDITE  Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique  UPEM  Université ParisEst MarnelaVallée  UPEC UP12  Université ParisEst Créteil ValdeMarne  Paris 12); Djibril Togola (ERUDITE  Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique  UPEM  Université ParisEst MarnelaVallée  UPEC UP12  Université ParisEst Créteil ValdeMarne  Paris 12) 
Abstract:  Recently, many academic researchers have implemented different numerical procedures to solve a dynamic portfolio choice problem especially in incomplete markets. The subsequent numerical results are sometimes significantly different from one paper to another. Thus, they have all advocated the accuracy of their methods. This paper contributes to this accuracy debate by showing how to obtain some accurate numerical results without numerical approximations, for a given investment horizon. We use a dynamic programming approach in continuoustime, and illustrate the framework with one risky and one riskless asset under a power utility. The framework is flexible enough to cover all the HARA class of utility functions. 
Date:  2015–05–26 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal01117787&r=upt 
By:  John D Hey; Konstantina Mari 
Abstract:  The disinvestment decision is of importance in many contexts: if funds are tied up for too long in a poorlyperforming project, then opportunities for reinvestment may be missed. Optimal disinvestment theory is a component of real options theory, but is relatively ignored by experimentalists. Two recent papers conclude that decisionmakers stay in projects longer than that prescribed by the optimal behaviour of a riskneutral agent. This departure is explained through riskaversion, but without a formal hypothesis under test. We report here on an experiment which explains the behaviour of the subjects through an estimationof riskaversion. We also explore an alternative hypothesis – that subjects are myopic. Our results show that few subjects appear to be riskneutral, many seem to be riskaverse but few are myopic. 
Keywords:  disinvestment, experiments, myopia, real options, riskaversion, rolling horizon 
JEL:  C9 G02 
Date:  2015–08 
URL:  http://d.repec.org/n?u=RePEc:yor:yorken:15/13&r=upt 
By:  Siddiqi, Hammad 
Abstract:  An anchoringadjusted option pricing model is developed in which the expected return of the underlying stock is used as a starting point that gets adjusted upwards to form expectations about corresponding call option returns. Anchoring bias implies that such adjustments are insufficient. In continuous time, the anchoring price always lies within the bounds implied by expected utility maximization when there are proportional transaction costs. Hence, an expected utility maximizer may not gain utility by trading against the anchoring prone investors. The anchoring model is consistent with key features in option prices such as implied volatility skew, superior historical performance of covered call writing, inferior performance of zerobeta straddles, smaller than expected call option returns, and large magnitude negative put returns. The model is also consistent with the puzzling patterns in leverage adjusted option returns, and extends easily to jumpdiffusion and stochasticvolatility approaches. 
Keywords:  Option Pricing, Implied Volatility, Anchoring Bias, Option Pricing Puzzles 
JEL:  G02 G13 
Date:  2014–01–10 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:66018&r=upt 
By:  Holanda Oliveira, Lucio Hellery; Carrasco Gutierrez, Carlos Enrique 
Abstract:  The traditional current account intertemporal model assumes that all individuals follow the permanent income theory. The innovation proposed in this work is to incorporate the idea that some consumers have rule of thumb behavior with the classic current account dynamics model and also to include habit formation in the utility function. Two stage least squares and generalized method of moments econometric techniques are applied to estimate the parameters: the share of aggregate income that follows the rule of thumb behavior and the habit formation coefficient. Based on the current account data on the Brazilian economy, the results confirm some stylized facts presented in the literature as well as some testable basic propositions of the intertemporal current account model. The rule of thumb behavior is significant and ranges from 0.48 to 0.54, indicating that the rule of thumb hypothesis is important in the model. Moreover, the habit formation coefficient also has some significance in the estimated model. 
Keywords:  Rule of Thumb; Consumption; Current Account; Intertemporal Model; Habit Formation. 
JEL:  C22 E21 F32 
Date:  2015 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:66079&r=upt 
By:  Matias Nunez (Thema, Université de CergyPontoise  THEMA  Théorie économique, modélisation et applications  Université de Cergy Pontoise  CNRS); JeanFrançois Laslier (PSE  ParisJourdan Sciences Economiques  CNRS  Institut national de la recherche agronomique (INRA)  EHESS  École des hautes études en sciences sociales  ENS Paris  École normale supérieure  Paris  École des Ponts ParisTech (ENPC), EEPPSE  Ecole d'Économie de Paris  Paris School of Economics) 
Abstract:  The paper considers twoperson bargaining under Approval Voting. It first proves the existence of pure strategy equilibria. Then it shows that this bargaining method ensures that both players obtain at least their average and median utility level in equilibrium. Finally it proves that, provided that the players are partially honest, the mechanism triggers sincerity and ensures that no alternative Pareto dominates the outcome of the game. 
Date:  2015–06 
URL:  http://d.repec.org/n?u=RePEc:hal:psewpa:halshs01168675&r=upt 
By:  Nicholas Economides (Stern School of Business, New York University. 44 West 4th Street, New York, NY 10012) 
Abstract:  We discuss the issue of a possible abolition of network neutrality and the introduction of paid prioritization by residential broadband access networks.We show that, in short run analysis where bandwidth is fixed, and in the absence of congestion, network neutrality tends to maximize total surplus. When an ISP violates network neutrality and invests the extra profits to bandwidth expansion, the presence of more bandwidth alleviates the allocative distortion, and can even reverse it. We also discuss the network neutrality issue under the assumption of congestion, and characterize the set of utility functions for which network neutrality is optimal, as well as utility functions where it is optimal to prioritize. Finally, we review regulatory rules in the United States on network neutrality. 
Keywords:  Internet, pricing, network neutrality, price discrimination, prioritization 
JEL:  D43 L11 L1 
Date:  2015–04 
URL:  http://d.repec.org/n?u=RePEc:net:wpaper:1501&r=upt 
By:  Antoinette Baujard (GATE  GATE Lyon SaintÉtienne  Groupe d'analyse et de théorie économique  CNRS  UCBL  Université Claude Bernard Lyon 1  UL2  Université Lumière  Lyon 2  Université Jean Monnet  SaintEtienne  PRES Université de Lyon  ENS Lyon  École normale supérieure  Lyon); Muriel Gilardone (CREM  Centre de Recherche en Economie et Management  CNRS  Université de Caen BasseNormandie  UR1  Université de Rennes 1) 
Abstract:  This paper aims to show that, contrary to the standard understanding of his work, Sen's idea of justice does not consist in the defense of a capability theory. Under the dominant capabilitycentered view, Sen's idea of justice is indeed characterized principally by a switch of focus from utility to capability. We demonstrate that this view amounts to the application of formal welfarism to capabilities. We reject this characterization and defend instead a heuristic account of the status of capability in Sen's thought: capability was introduced to make a point against welfarism, but this does not imply that a commitment to a capability theory. The capabilitycentered view is shown to be inconsistent with Sen's idea of justice, because the latter requires agents to be involved in the definition of their own welfare. Our study of the status of capability in Sen's view of justice enables us to relocate his main contribution and to build the basis for an alternative theory of justice. Abstract. This paper aims to show that, contrary to the standard understanding of his work, Sen's idea of justice does not consist in the defense of a capability theory. Under the dominant capabilitycentered view, Sen's idea of justice is indeed characterized principally by a switch of focus from utility to capability. We demonstrate that this view amounts to the application of formal welfarism to capabilities. We reject this characterization and defend instead a heuristic account of the status of capability in Sen's thought: capability was introduced to make a point against welfarism, but this does not imply that a commitment to a capability theory. The capabilitycentered view is shown to be inconsistent with Sen's idea of justice, because the latter requires agents to be involved in the definition of their own welfare. Our study of the status of capability in Sen's view of justice enables us to relocate his main contribution and to build the basis for an alternative theory of justice. 
Date:  2015 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs01139118&r=upt 
By:  Calub, Renz Adrian 
Abstract:  Physicians are expected to provide the best health care to their patients; however, it cannot be discounted that their practice is driven primarily by incentives. In this paper, we construct a physician utility maximization model that links physician quality to compensation schemes. Results show that relative to fixed payment, feeforservice and mixed payment yield higher quality. Multinomial treatment effects regression of vignette scores on payment schemes also support this hypothesis, indicating that physicians are still below the best level of quality and that incentives to improve are still present. 
Keywords:  Physician, quality of healthcare, incentives, compensation schemes 
JEL:  I11 J44 
Date:  2014–06 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:66038&r=upt 