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on Utility Models and Prospect Theory |
| By: | Jose Apesteguia; Miguel A. Ballester |
| Abstract: | Suppose that, when evaluating two alternatives x and y by means of a parametric utility function, low values of the parameter indicate a preference for x and high values indicate a preference for y. We say that a stochastic choice model is monotone whenever the probability of choosing x is decreasing in the preference parameter. We show that the standard use of random utility models in the context of risk and time preferences may sharply violate this monotonicity property, and argue that their use in preference estimation may be problematic. In particular, they may pose identification problems and yield biased estimations. We then establish that the alternative random parameter models, in contrast, are always monotone. We show in an empirical application that standard risk-aversion assessments may be severely biased. |
| Keywords: | Stochastic Choice; Preference Parameters; Random Utility Models; Random Parameter Models; Risk Aversion; Delay Aversion. |
| JEL: | C25 D81 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1499&r=upt |
| By: | Nicolas Drouhin (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, ENS Cachan - École normale supérieure - Cachan) |
| Abstract: | By solving dynamic optimization programs, we study the most general class of intertemporal utility functional, that are additive, but not necessarily stationary, nor multiplicatively separating a discount factor from "per period utility". We define the fisherian instantaneous subjective rate of discount as the log-derivative of the marginal utility of consumption. We prove that time consistency holds, if and only if, the "per period" felicity function is multiplicatively separable in t, the date of decision and in s, the date of consumption, or equivalently, if the instantaneous subjective rate of discount does not depend on t. The model allows to explain "anomalies in intertemporal choice" and various empirical regularities even when the agent are time consistent. On the other hand, the model allows to characterize mathematically the "effective consumption profile" of naive time inconsistent agent. |
| Keywords: | intertemporal choice, life cycle theory of consumption and saving, stationarity, time consistency, time invariance, exponential discounting, hyperbolic discounting, aging |
| Date: | 2015–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01238584&r=upt |
| By: | Piero Gottardi (European University Institute - Department of Economics); Jean-Marc Tallon (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Paolo Ghirardato (Collegio Carlo Alberto - Via Real Collegio 30) |
| Abstract: | This paper studies the costs and benefits of delegating decisions to superiorly informed agents, that is of adopting flexible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice in two different environments, one with risk and one with ambiguity. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent's degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties have imprecise probabilistic beliefs, the agent's degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts. JEL Classification: D86, D82, D81. |
| Keywords: | Agency Costs,Delegation,Flexibility,Imprecision Aversion,Multiple Priors |
| Date: | 2015–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-01238046&r=upt |
| By: | Kircher, Philipp; Marzilli Ericson, Keith; Spinnewijn, Johannes; Starc, Amanda |
| Abstract: | Demand for insurance can be driven by high risk aversion or high risk. We show how to separately identify risk preferences and risk types using only choices from menus of insurance plans. Our revealed preference approach does not rely on rational expectations, nor does it require access to claims data. We show what can be learned non-parametrically from variation in insurance plans, offered separately to random cross-sections or offered as part of the same menu to one cross-section. We prove that our approach allows for full identification in the textbook model with binary risks and extend our results to continuous risks. We illustrate our approach using the Massachusetts Health Insurance Exchange, where choices provide informative bounds on the type distributions, especially for risks, but do not allow us to reject homogeneity in preferences. |
| Keywords: | heterogeneity; identification; insurance |
| JEL: | D81 D83 G22 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10981&r=upt |
| By: | Habib, Sameh; Friedman, Daniel; Crockett, Sean; James, Duncan |
| Abstract: | We introduce new graphical displays that present binary choice lotteries via three dimensional rotating pie charts whose heights represent the prize amounts. We compare four graphical versions to the original text-only Holt & Laury (2002) multiple price list. Parametric and non-parametric measures of risk preferences are found to shift towards risk neutrality for the graphical displays. |
| Keywords: | Multiple Price List,Elicitation,Risk Aversion,Experiment |
| JEL: | C91 D81 D89 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbmdn:spii2015501&r=upt |
| By: | Maximilian Rüdisser (Department of Business Administration, University of Zurich); Raphael Flepp (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich) |
| Abstract: | In order to promote risky behavior, it is a common practice that casinos incentivize their customers through the provision of free financial means, i.e., free play. Thereby, casino operators try to exploit what is known as the house money effect. However, evidence from the field is scarce and prior research provides explanations that predict different behavioral outcomes. This experimental study analyzes the gambling behavior of 765 casino customers and finds that incentivized customers show not higher but significantly lower levels of riskseeking behavior, expressed through lower wagers per game and overall smaller losses. This study thus provides evidence against the existence of a house money effect. |
| Keywords: | House money effect, Prospect theory, Natural experiment, Casino gambling |
| JEL: | D80 D81 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:zrh:wpaper:360&r=upt |
| By: | Kim, Minseong |
| Abstract: | The very fact that utility maximization in real business cycle and New Keynesian models is intertemporal suggests the possibility of a Fisherian intertemporal futures market, which is not state-contingent. Ex-ante speaking, the addition of a futures market does not result in any difference, but the addition does make difference ex-post. Furthermore, New Keynesian models rely on nominal effects, and what would introduction of a Fisherian futures market mean for these models? This paper answers this question by presenting a model that features Fisherian intertemporal futures markets. |
| Keywords: | futures market, certainty equivalence, new keynesian, collaterals, renegotiation |
| JEL: | E12 E13 E32 E43 E44 |
| Date: | 2015–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68387&r=upt |
| By: | Niall Flynn; Christopher Kah; Rudolf Kerschbamer |
| Abstract: | In an experiment we first elicit the distributional preferences of subjects and then let them bid for a lottery, either in a Becker-DeGroot-Marschak (BDM) mechanism or a Vickrey auction (VA). Standard theory predicts that altruistic subjects underbid in the VA -- compared to the BDM -- while spiteful subjects overbid in the VA. The data do not confirm those predictions. While we observe aggregate underbidding in the VA, the result is not driven by the choices of altruistic subjects. |
| Keywords: | Distributional preferences, BDM, Vickrey auction |
| JEL: | C91 C72 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2015-16&r=upt |
| By: | Niall Flynn; Christopher Kah; Rudolf Kerschbamer |
| Abstract: | In an experiment we first elicit the distributional preferences of subjects and then let them bid for a lottery, either in a Becker-DeGroot-Marschak (BDM) mechanism or a Vickrey auction (VA). Standard theory predicts that altruistic subjects underbid in the VA -- compared to the BDM -- while spiteful subjects overbid in the VA. The data do not confirm those predictions. While we observe aggregate underbidding in the VA, the result is not driven by the choices of altruistic subjects. |
| Keywords: | Distributional preferences, BDM, Vickrey auction |
| JEL: | C91 C72 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2015-16_appendix&r=upt |
| By: | Nicolas Gravel; Michel Poitevin |
| Abstract: | This paper discusses the problem of optimal design of a jurisdiction structure from the view point of a utilitarian social planner when individuals with identical utility functions for a non-rival public good and private consumption have private information about their contributive capacities. It shows that the superiority of a centralized provision of a non-rival public good over a federal one does not always hold. Specifically, when differences in individuals’ contributive capacities are large, it is better to provide the public good in several distinct jurisdictions rather than to pool these jurisdictions into a single one. In the specific situation where individuals have logarithmic utilities, the paper provides a complete characterization of the optimal jurisdiction structure in the two-type case. "C’est pour unir les avantages divers qui résultent de la grandeur et de la petitesse des nations que le fédératif a été créé." (Alexis de Toqueville) |
| Keywords: | Federalism, jurisdictions, asymmetric information, equalization, second best, public goods, city mergers, |
| JEL: | D6 H2 H7 |
| Date: | 2015–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2015s-53&r=upt |
| By: | Lian Xue (University of East Anglia); Stefania Sitzia (University of East Anglia); Theodore L. Turocy (University of East Anglia) |
| Abstract: | We replicate and extend a simple riskless choice experiment reported recently by Hochman et al. (2014) as supporting loss aversion for money. Participants select from among sets of standard playing cards, with values defined by a simple formula. In some sessions, participants are given a prepayment associated with some of the cards, which need not be the earnings- maximizing ones. We replicate the results of Hochman et al., but find the effect of prepayment is significantly modulated by the instructions; instructions which more explicitly link payments and choices eliminate the effect. Participants who have been in many economics experiments before do not choose differently than those who are relative novices. However, we find that a self-reported measure of confidence in mathematics is a strong predictor of maximization rates. These results are more consistent with a preference for defaults when evaluating alternatives requires cognitive effort. |
| Keywords: | loss aversion, prepayment, replication, mathematics self-confidence, lab rats |
| JEL: | C91 D83 |
| Date: | 2015–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:uea:wcbess:15-20&r=upt |
| By: | Kokkala, Juho; Poropudas, Jirka; Virtanen, Kai |
| Abstract: | Games with incomplete preferences are normal-form games where the preferences of the players are defined as partial orders over the outcomes of the game. We define rationality in these games as follows. A rational player forms a set-valued belief of possible strategies selected by the opponent(s) and selects a strategy that is not dominated with respect to this belief. Here, we say a strategy is dominated with respect to the set-valued belief if the player has another strategy that would yield a better outcome according to the player's preference relation, no matter which strategy combination the opponent(s) play among those contained in the belief. We define rationalizable strategies as the logical implication of common knowledge of this rationality. We show that the sets of rationalizable strategies are the maximal mutually nondominated sets, i.e., the maximal sets that contain no dominated strategies with respect to each other. We show that no new rationalizable strategies appear when additional preference information is included. We consider multicriteria games as a special case of games with incomplete preferences and introduce a way of representing incomplete preference information in multicriteria games by sets of feasible weights of the criteria. |
| Keywords: | Normal-form games, incomplete preferences, rationalizable strategies, multicriteria games |
| JEL: | C72 |
| Date: | 2015–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68331&r=upt |