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on Utility Models and Prospect Theory |
| By: | Iñigo Iturbe-Ormaetxe Kortajarene (Universidad de Alicante); Giovanni Ponti (Universidad de Alicante); Josefa Tomás Lucas (Universidad de Alicante) |
| Abstract: | Gneezy and Potters (1997) run an experiment to test the empirical content of Myopic Loss Aversion (MLA). They find that the attractiveness of a risky asset depends upon the investors’ time horizon: consistently with MLA, individuals are more willing to take risks when they evaluate their investments less frequently. This paper shows that these experimental findings can be easily accommodated by the most standard version of Expected Utility Theory, namely a CRRA specification. Additionally, we use four different datasets to estimate a CRRA model and two alternative MLA versions, together with various mixture specifications of the two competing models. Our econometric exercise finds little evidence of subjects’ loss aversion, which provides empirical ground for our theoretical claim. |
| Keywords: | Expected Utility Theory, Myopic Loss Aversion, Evaluation Period |
| JEL: | C91 D81 D14 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2015-09&r=upt |
| By: | Harin, Alexander |
| Abstract: | In random–lottery incentive experiments, the choices of certain outcomes are stimulated by uncertain lotteries. This “certain–uncertain” inconsistency is evident, but only recently emphasized. Because of it, conclusions from a random–lottery incentive experiment that includes a certain outcome cannot be unquestionably correct. Well-known experimental results and purely mathematical theorems support this. The main result presented here is: The usual experimental systems of utility and prospect theories may need additional independent analyses in the context of the “certain–uncertain” inconsistency. |
| Keywords: | utility; prospect theory; experiment; incentive; random-lottery incentive system; Prelec; probability weighting function; |
| JEL: | C1 C9 C90 C91 C93 D8 D81 |
| Date: | 2015–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67911&r=upt |
| By: | Richard Charlton |
| Abstract: | The chaotic and ergodic equilibrium consumption profiles of a two period lived representative agent overlapping generations model are examined. Given a specific utility function, it is shown that for a typical equilibrium path expected indirect utility of consumption is less than the utility of expected equilibrium consumption. In turn, utility of expected consumption in equilibrium is less than utility at the steady state equilibrium. This result holds for a set of equilibrium maps of positive measure and suggests that stabilisation of the erratic system would bring about an improvement in welfare. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:559&r=upt |
| By: | Bin Zou; Rudi Zagst |
| Abstract: | We study optimal investment problems with transaction costs under Kahneman and Tversky's cumulative prospective theory (CPT). A CPT investor makes investment decisions in a single-period discrete time financial market consisting of one risk-free asset and one risky asset, in which trading the risky asset incurs proportional costs. The objective is to seek the optimal investment to maximize the prospect value of the investor's final wealth. We have obtained explicit optimal investment to this problem in two examples. An economic analysis is conducted to investigate the impact of the transaction costs and risk aversion on the optimal investment. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1511.04768&r=upt |
| By: | Decker, Simon; Schmitz, Hendrik |
| Abstract: | Risk preferences are typically assumed to be constant for an individual across the life cycle. In this paper we empirically assess if they are time varying. Specifically, we analyse whether health shocks influence individual risk aversion. We follow an innovative approach and use grip strength data to obtain an objective health shock indicator. In order to account for the non-random nature of our data we employ regression-adjusted matching. Health shocks are found to increase individual risk aversion. The finding is robust to a series of sensitivity analyses. |
| Abstract: | Risikopräferenzen werden typischerweise als konstant über den Lebenszyklus eines Individuums angenommen. In dieser Arbeit untersuchen wir diese Annahme empirisch. Konkret analysieren wir, ob Gesundheitsschocks den Grad individueller Risikoaversion beeinflussen. Hierbei verwenden wir die Greifkraft zur objektiven Messung von Gesundheitsschocks und regression adjusted matching. Im Ergebnis zeigt sich, dass Gesundheitsschocks den Grad individueller Risikoaversion erhöhen. Dieser Befund ist robust über eine Vielzahl von Sensitivitätsanalysen. |
| Keywords: | risk preferences,health shocks,hand grip strength,regression-adjusted matching |
| JEL: | C81 D01 D81 I10 I12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:581&r=upt |