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on Utility Models and Prospect Theory |
| By: | Anthony Scott (Melbourne Institute of Applied Economic and Social Research, University of Melbourne); Julia Witt (Department of Economics, University of Manitoba) |
| Abstract: | In the discrete choice experiment literature, it has been argued that the choice sets from which respondents choose should include an unforced choice because this is more realistic and accounts for status quo bias. However, we propose a much stronger set of arguments for preferring to use unforced choices where relevant. These relate to the concepts of loss aversion, reference dependence and diminishing sensitivity from prospect theory. We use data from a discrete choice experiment of different types of jobs for nurses, where the introduction of a third alternative, representing the respondent’s current job, changes the reference point, which is different for each respondent. The increased salience of the reference point, in turn, changes the size of any losses or gains when comparing Job A or Job B with their current situation, and since losses are valued more than gains, this affects the marginal utility of each attribute. This has implications for policy conclusions based on willingness to pay. Including an unforced choice is necessary (when appropriate) not only for the purposes of ‘realism’, but also because different marginal utilities are produced due to loss aversion, reference dependence and diminishing sensitivity. Classification-I11, J24, J32, D80, C99 |
| Keywords: | Discrete choice experiments, loss aversion, reference dependence, diminishing sensitivity, health workforce |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2015n16&r=all |
| By: | Anna Conte (University of Westminster); Peter G. Moffatt (University of East Anglia); Mary Riddel (University of Nevada) |
| Abstract: | In a series of field experiments, we elicit risk preferences for financial, life-duration, and environmental domains using sequential multiple price-list auctions. We intentionally oversample subjects who frequently engage in activities that increase their mortality risk. We analyze the data using a bivariate Random Preference approach. Under the assumption that subjects are Rank Dependent Utility maximizers, we estimate the joint distribution of the CRRA and probability weighting coefficients. We find that the experienced risk takers are less likely than the student control group to overweight small probability, extreme events in their decision making. This is true in all three domains. We find that the tendency of women to be more risk averse in the financial domain than men arises from probability weighting rather than differences in the utility function. Finally, we show that a significant minority of subjects deviate from the type of s-inverse probability weighting typically observed in experiments. |
| JEL: | D0 D12 D81 Q53 I12 C91 C93 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:uea:wcbess:15-10&r=all |
| By: | Pietro DeLellis; Franco Garofalo; Francesco Lo Iudice; Elena Napoletano |
| Abstract: | This paper studies the trading volumes and wealth distribution of a novel agent-based model of an artificial financial market. In this model, heterogeneous agents, behaving according to the Von Neumann and Morgenstern utility theory, may mutually interact. A Tobin-like tax on successful investments and a flat tax are compared to assess the effects on the agents' wealth distribution. We carry out extensive numerical simulations in two alternative scenarios: i) a reference scenario, where the agents keep their utility function fixed, and ii) a focal scenario, where the agents are adaptive and self-organize in communities, emulating their neighbours by updating their own utility function. Specifically, the interactions among the agents are modelled through a directed scale-free network to account for the presence of community leaders, and the herding-like effect is tested against the reference scenario. We observe that our model is capable of replicating the benefits and drawbacks of the two taxation systems and that the interactions among the agents strongly affect the wealth distribution across the communities. Remarkably, the communities benefit from the presence of leaders with successful trading strategies, and are more likely to increase their average wealth. Moreover, this emulation mechanism mitigates the decrease in trading volumes, which is a typical drawback of Tobin-like taxes. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1509.01217&r=all |
| By: | Huy N. Chau; Andrea Cosso; Claudio Fontana; Oleksii Mostovyi |
| Abstract: | We generalize the results of Mostovyi (2015) on the problem of optimal investment with intermediate consumption in a general semimartingale setting. We show that the no unbounded profit with bounded risk condition suffices to establish the key duality relations of utility maximization and, moreover, represents the minimal no-arbitrage-type assumption. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1509.01672&r=all |
| By: | Lioudmila Vostrikova |
| Abstract: | We consider utility maximisation problem for exponential Levy models and HARA utilities in presence of illiquid asset. This illiquid asset is modelled by an option of European type on another risky asset which is correlated with the first one. Under some hypothesis on Levy processes, we give the expressions for information processes figured in maximum utility formula. As applications, we consider Black-Scholes models with correlated Brownian Motions, and also Black-Scholes models with jump part represented by Poisson process. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1509.02727&r=all |
| By: | Alice Hsiaw (Brandeis University) |
| Abstract: | This paper studies the role of goal bracketing to attenuate time inconsistency. When setting non-binding goals in multi-stage project, an agent must also decide how and when to evaluate himself against such goals. In particular, he can bracket broadly by setting an aggregate goal for the entire project, or narrowly by setting incremental goals for individual stages. In the presence of loss aversion and uncertainty over outcomes, this decision involves a trade-off between motivation and comparative disutility due to ex-ante uncertainty. Narrow goal bracketing can be used as an instrument to counteract the self-control problem, while broad goal bracketing can itself generate apparently erroneous behavior such as the sunk cost fallacy. The sequential nature of decision-making introduces a differential reaction to outcome uncertainty based on its timing, which determines the optimal bracketing choice. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:90&r=all |
| By: | Andrew E. Clark (PSE - Paris-Jourdan 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), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Yarine Fawaz (UAB - Universitat Autonoma de Barcelona) |
| Abstract: | The individual level of subjective well-being (SWB) has been shown to predict a number of future observable outcomes. Behaviour may however also be affected by the slope of SWB with respect to certain variables. We here use latentclass analysis to model both intercept and slope heterogeneity in the SWB-income relationship, and construct a continuous measure of the marginal utility of income. We show this marginal utility does predict future behaviour: those who value income more (who have a higher income elasticity of well-being) are less likely to retire. This correlation is found conditional on both the level of income and the level of well-being. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01189009&r=all |
| By: | Franco, Daniele; Luiselli, Luca |
| Abstract: | The estimation of wetlands’ non-use values to build up a total economic evaluation can be based on stated preference methods, which derives from the standard economic model that assumes a rational assessment of the consequence of preferences on personal utility. The paper describes the citizens’ shared ecological knowledge (SEK) of wetlands functions. It descibes SEK nature, SEK relation with the official knowledge, the relation between the motivations outlined by SEK and those expected by the standard economic model. The results demonstrate that economic preferences are driven by multiple motivations well rooted in the SEK’s social nature, and not by simply consequential motivations. In this case study, social knowledge of wetlands' ecological functions is proportionally related to people's living proximity to those wetlands. Unexpectedly, SEK of historically well-known and critically important services like hydraulic and hydrologic services has also been diminishing. Furthermore, there is a partial or clear-cut separation between official knowledge and SEK on crucial aspects like wetlands’ climate change role. This approach helps to construct a motivational framework to derive values that are useful as long as they allow accounting for a complex socio-cultural capital in the public decision making process. |
| Keywords: | Wetlands; ecosystem services; ecological functions; public goods; multiple motivation analyses; environmental awareness; perceived utility |
| JEL: | Q5 Q57 Z1 Z13 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66496&r=all |
| By: | Kuzmin, Evgeny A. |
| Abstract: | It is believed that a spontaneous nature of the uncertainty and its conceptual ambiguity reject a conceptual opportunity of management. Such a disposition, that has become a prevailing stereotype for the perceived uncertainty, leads us away from a productive solution to a number of pressing challenges to maintain economic safety and sustainable development. In opposition to this, in the paper, there is a thesis of administrative acceptability submitted for an academic discussion, methodological implementation of which is in line with a number of fundamental paradigms. It is a disclosure and systematization of uncertainty management principles that is a focus of the paper. The paper pays a special attention to an issue of perceived approaches to management, which have become traditional so far. There are also refined structural characteristics of the uncertainty functions and specifics of the management process. |
| Keywords: | uncertainty, risk, uncertainty functions, systainability, uncertainty management principles. |
| JEL: | D80 D81 M10 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66468&r=all |
| By: | Avram, Silvia |
| Abstract: | A substantive body of research highlights the existence of framing effects in labour supply responses to taxation challenging traditional models that assume taxes only influence behaviour via the budget constraint. Using a lab experiment, this paper examines the presence of differential responses to identical marginal tax schedules coming from direct taxation and from benefit withdrawal respectively. In an incentivised real-effort task, subjects supply time and effort while facing an incentive structure that is framed as taxation or benefit withdrawal respectively, while yielding the exact same budget constraint. Results indicate that subjects in the benefit withdrawal condition are more likely to reduce working time compared to both subjects in the tax treatment and a control group where the incentive structure is described without using the language of taxes and benefits. The effect is driven by loss-averse individuals suggesting that benefit streams may be subject to an ‘endowment effect’. The findings have clear implications for welfare policy design. |
| Date: | 2015–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:ese:iserwp:2015-17&r=all |
| By: | Chang, Simon (University of Western Australia); Dee, Thomas S. (Stanford University); Tse, Chun-Wing (Central University of Finance and Economics); Yu, Li (Central University of Finance and Economics) |
| Abstract: | We conducted large-scale lost letter experiments in Beijing, a megacity with more than 21 million residents, to test if the observed altruistic attribute of the letter recipient would induce more passersby to return the lost letters. The treatment letters were addressed to a nationally renowned charitable organization in China, while the control letters were intended to an invented individual. A total of 832 ready-to-be-posted letters were distributed in 208 communities across eight districts in the city. The overall return rate was only about 13%. Yet, the return rate of the treatment letters (17%) was nearly twice as high as that of the control letters (9%). The finding adds large-scale field experiment evidence in support of the interdependent other-regarding preferences theory. In addition, we also found that the lost letters were more likely to be returned if they were dropped in communities with a relatively higher income or a postal box located closer. |
| Keywords: | other-regarding preferences, lost letter technique, altruism, China |
| JEL: | C93 D03 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9319&r=all |
| By: | Kazuhiko Hashimoto; Takuma Wakayama |
| Abstract: | We consider the problem of fairly reallocating the individual endowments of a perfectly divisible good among agents with single-peaked preferences. We provide a new concept of fairness, called position-wise envy-freeness, that is compatible with individual rationality. This new concept requires that each demander (i.e., agent whose most preferred amount is strictly greater than his endowment) should not envy another demander who does not receive his endowment and that each supplier (i.e., agent whose most preferred amount is strictly less than his endowment) should not envy another supplier who does not receive his endowment. We establish that a rule is efficient, individually rational, strategy-proof, and position-wise envy-free if and only if it is the gradual uniform rule, which is an extension of the well-known uniform rule. |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0947&r=all |