|
on Utility Models and Prospect Theory |
| By: | Sergio Nisticò (University of Cassino and Lazio Meridionale) |
| Abstract: | Hermann Heinrich Gossen (1810-1858) — a civil servant who, in 1854, published at his expense the book Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fließenden Regeln für menschliches Handeln — has traditionally been considered a forerunner of the neoclassical theory of consumption based on the law of diminishing marginal utility. It is only with the long-awaited publication, in 1983, of the English translation of Gossen’s book, that his editor, Nicholas Georgescu-Roegen, started to see in The Laws of Human Relations and the Rules of Human Action Derived Therefrom the roots of a wholly different theory of consumption in which the flow of calendar time plays a crucial and non-trivial role. By going through the works of Jevons, Menger and Walras, the paper argues that the logical and theoretical connection between Gossen’s approach to consumption choices and the marginalist school is unwarranted. Theoretical connections, if any, can be found between Gossen and the classical economists on the one hand and the English ‘liberal’ tradition of John Stuart Mill and J.M. Keynes on the other. |
| JEL: | B13 D01 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:csn:wpaper:2016-01&r=upt |
| By: | Clemens Hetschko; Malte Preuss |
| Abstract: | Using German panel data, we assess the causal effect of job loss, and thus of an extensive income shock, on risk attitude. In line with predictions of expected utility reasoning about absolute risk aversion, losing one’s job reduces the willingness to take risks. This effect strengthens in previous hourly wage, begins to manifest itself as soon as an employee perceives the threat of job loss and is of a transitory nature. The change in stated risk attitude matches observable job finding behaviour, confirming the behavioural validity of our results. |
| Keywords: | absolute risk aversion; income shock; job loss; plant closure; general risk attitude |
| JEL: | D81 J64 J65 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp813&r=upt |
| By: | Mauro Bernardi; Leopoldo Catania |
| Abstract: | Signals coming from multivariate higher order conditional moments as well as the information contained in exogenous covariates, can be effectively exploited by rational investors to allocate their wealth among different risky investment opportunities. This paper proposes a new flexible dynamic copula model being able to explain and forecast the time-varying shape of large dimensional asset returns distributions. Moreover, we let the univariate marginal distributions to be driven by an updating mechanism based on the scaled score of the conditional distribution. This framework allows us to introduce time-variation in up to the fourth moment of the conditional distribution. The time-varying dependence pattern is subsequently modelled as function of a latent Markov Switching process, allowing also for the inclusion of exogenous covariates in the dynamic updating equation. We empirically assess that the proposed model substantially improves the optimal portfolio allocation of rational investors maximising their expected utility. |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1601.05199&r=upt |
| By: | Chris Godfrey (ICMA Centre, Henley Business School, University of Reading); Chris Brooks (ICMA Centre, Henley Business School, University of Reading); |
| Abstract: | Prior research has documented that, counter-intuitively, high credit risk stocks earn lower – not higher – returns than low credit risk stocks. In this paper we provide evidence against rational expectations explanations, and show that a model incorporating limits-to-arbitrage factors is capable of explaining this apparent anomaly. We demonstrate that the negative pricing of credit stocks is driven by the underperformance of stocks which have both high credit risk and which have suffered recent relative underperformance, and that their ongoing poor performance can be explained by a mixture of four limits-to-arbitrage factors – idiosyncratic risk, turnover, illiquidity and bid-ask spreads. Collectively, these impede the correction of mispricing by arbitrageurs, especially on the short leg of the trade, where commonly reported returns are unattainable. |
| Keywords: | behavioural finance, relative distress, credit risk premium puzzle, asset pricing, limits to arbitrage |
| JEL: | C31 D03 G12 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:icmadp:icma-dp2015-07&r=upt |
| By: | Zbigniew Mogiła (Wrocław Regional Development Agency) |
| Abstract: | Although elements of spatially-oriented analysis have been long used to augment production functions, relatively less attention has been paid so far to implementation of territory within the neoclassical utility theory. Taking into account territorial heterogeneity and the importance of geographical-temporal distance, we introduce the category of social territorial utility and incorporate it into the neoclassical optimization framework aiming to show how it might influence the production process. The main objective of this paper is to present how territorial utility might be formally incorporated in the mainstream economics within the framework of the model of territorial optimum. The expected social territorial utility is shaped by social consensus and is reflected by public policies. It poses a new endogenous force to disturb the spatial equilibrium which is defined – among others – by NEG models as an utility equalization across different locations. The theory of social territorial utility shows that such an equilibrium may only be apparent. There might be strong endogenously driven motivations to change the spatial status-quo even though NEG models suggest otherwise. Those motivations may vary considerably among regions and their source lies in market failures. With the model of territorial optimum we clearly show that one ought not to analyse an economic optimisation without taking into account diverse spatial preferences. Using the model of territorial optimum we define and include in the paradigm of mainstream economics the category of territorial cohesion, and organize its structure and indicate its position in the process of development. It is not our purpose to make any normative judgments in this paper. The model of territorial optimum presents a positive approach to territorial cohesion and its implications for regional development. The implications are likely to be very diverse due to differences in expected social territorial utility reflected in policies of regional authorities. We illustrate this by carrying out a scenario analysis for the Polish NUTS-2 region of Dolnośląskie. The main conclusion is that territorial cohesion should not be treated as an absolute category, i.e., the ideal and universal state of the territory. |
| Keywords: | Territorial cohesion, territorial utility, NEG, neoclassical paradigm, production function |
| JEL: | R11 R12 R58 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:iro:wpaper:1517&r=upt |
| By: | Sagebiel, Julian; Glenk, Klaus; Meyerhoff, Jürgen |
| Keywords: | Agricultural and Food Policy, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:eaa150:212640&r=upt |
| By: | L. A. Franzoni |
| Abstract: | This paper develops an original mean-variance model able to capture the disposition of the parties towards both standard risk and ambiguity. Ambiguity arises when the causal link between conduct and harm is not univocal, as is frequently the case with toxic torts. Risk aversion and ambiguity aversion tend to have a similar impact on optimal liability rules if greater care reduces the ambiguity perceived by the parties, i.e. if safety and predictability go hand in hand. Strict liability dominates negligence when the injurer has lower degrees of risk and ambiguity aversion than the victim and can formulate less ambiguous estimates of the probability of harm. The reverse result only holds under stronger conditions. |
| JEL: | K13 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1048&r=upt |
| By: | Franz Dietrich (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); Christian List (LSE - London School of Economics) |
| Abstract: | We introduce a "reason-based" framework for explaining and predicting individual choices. The key idea is that a decision-maker focuses on some but not all properties of the options and chooses an option whose "motivationally salient" properties he/she most prefers. Reason-based explanations can capture two kinds of context-dependent choice: (i) the motivationally salient properties may vary across choice contexts, and (ii) they may include "context-related" properties, not just "intrinsic" properties of the options. Our framework allows us to explain boundedly rational and sophisticated choice behaviour. Since properties can be recombined in new ways, it also offers resources for predicting choices in unobserved contexts. |
| Keywords: | Rational choice,reasons,context-dependence,bounded and sophisticated rationality,prediction of choice |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01249514&r=upt |
| By: | Franz, Markus; Scholz, Michael; Hinz, Oliver |
| Date: | 2016–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:77129&r=upt |
| By: | Aliprantis, Dionissi (Federal Reserve Bank of Cleveland) |
| Abstract: | This paper presents a generalization of the DeGroot learning rule in which social learning can lead to polarization, even for connected networks. I first develop a model of biased assimilation in which the utility an agent receives from past decisions depends on current beliefs when uncertainty is slow to resolve. I use this model to motivate key features of an agent’s optimization problem subject to scarce private information, which forces the agent to extrapolate using social information. Even when the agent extrapolates under “scientific” assumptions and all individuals in the network process and report their private signals in an unbiased way, the possibility of biased processing or reporting leads agents to process social signals differently depending on the sender. The resulting solution to the agent’s problem is a heterogeneous confidence learning rule that is distinct from bounded confidence learning rules in that the agent may actually move her beliefs away from, and not only discard, signals from untrustworthy senders. |
| Keywords: | Biased Assimilation; Social Learning; Network; DeGroot Learning Rule; Bounded Confidence; Heterogeneous Confidence; Self-Affirmation; |
| JEL: | D83 |
| Date: | 2016–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1604&r=upt |
| By: | José Antonio Robles-Zurita (Department of Economics, Universidad Pablo de Olavide); José Luis Pinto-Prades (Yunus Centre for Social Business and Health, Glasgow Caledonian University, and Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | Theoretical predictions entails that subjective beliefs of randomness affect the aggregation of medical outcomes of multiple-play medical treatments. Particularly, those who believe in more repetition of random events would tend to believe that multiple-play treatments are riskier medical interventions. As a consequence the level of repetition bias could reduce (increase) the willingness to accept or recommend multiple-play medical treatments if people are risk averse (risk prone). On the contrary, the repetition bias is expected to not affect single-play treatments. In an experiment we find evidence for these theoretical predictions by exploiting the between individual variation in the repetition bias for risk averse and risk prone subjects and by analysing hypothetical decisions of the Spanish general population for medical treatments in single and multiple-play scenarios. Consequences for individual decision making in the health context are considered as well as for the interpretation of the differences between single vs. multiple play treatments in previous studies. |
| Keywords: | medical treatments; single-play, multiple-play, repetition bias, alternation bias. |
| JEL: | D03 D81 I12 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:15.16&r=upt |