nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2016‒03‒17
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Sunspot Fluctuations in Two-Sector Models with Variable Income Effects By Frédéric Dufourt; Kazuo Nishimura; Carine Nourry; Alain Venditti
  2. Subjective expected utility with state-dependent but action/observation-independent preferences By DREZE, J.
  3. Recursive Utility and the Solution to the Bellman Equation By Masayuki Yao
  4. Eliciting Risk Preferences: Firefighting in the Field By Dasgupta, Utteeyo; Mani, Subha; Sharma, Smriti; Singhal, Saurabh
  5. On Harsanyi dividends and asymmetrid values By DEHEZ, P.
  6. About Delay Aversion By Lorenzo Bastianello; Alain Chateauneuf
  7. Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium? By Rangan Gupta; Shawkat Hammoudeh; Mampho P. Modise; Duc Khuong Nguyen
  8. Comparison of Methods for Estimating the Uncertainty of Value at Risk By Santiago Gamba Santamaría; Oscar Fernando Jaulín Méndez; Luis Fernando Melo Velandia; Carlos Andrés Quicazán Moreno
  9. A paradox of rationality à la von Neumann-Morgenstern By Ismail M.S.

  1. By: Frédéric Dufourt (Aix-Marseille University (Aix-Marseille School of Economics)-CNRS-EHESS); Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics)-CNRS-EHESS); Alain Venditti
    Abstract: We analyze a version of the Benhabib and Farmer [3] two-sector model with sector-specific externalities in which we consider a class of utility functions inspired from the one considered in Jaimovich and Rebelo [14] which is flexible enough to encompass varying degrees of income effect. First, we show that local indeterminacy and sunspot fluctuations occur in 2-sector models under plausible configurations regarding all structural parameters – in particular regarding the intensity of income effects. Second, we prove that there even exist some configurations for which local indeterminacy arises under any degree of income effect. More precisely, for any given size of income effect, we show that there is a non-empty range of values for the Frisch elasticity of labor and the elasticity of intertemporal substitution in consumption such that indeterminacy occurs. This contrasts with the results obtained in one-sector models in both Nishimura et al. [19], in which it is shown that indeterminacy cannot occur under either GHH and KPR preferences, and in Jaimovich [13] in which local indeterminacy only arises for intermediary income effects.
    Keywords: Indeterminacy, sunspots, income and substitution effects, sector-specific externalities, infinite horizon two-sector model
    JEL: C62 E32 O41
    Date: 2016–01
  2. By: DREZE, J. (Université catholique de Louvain, CORE, Belgium)
    Abstract: Under state-dependent preferences, probabilities and units of scale of statedependent utilities are not separately identified, in standard models: only their products matter to decisions. Separate identification has been studied under implicit actions (Drèze 1987) or under explicit actions and observations (Karni 2011). This paper complements both approaches and relates them.
    Keywords: expected utility, state-dependent preferences, subjective probability
    JEL: D81
    Date: 2015–10–20
  3. By: Masayuki Yao (Research Associate (Non-tenured), Department of Economics, Keio University)
    Abstract: This study infinite-horizon deterministic dynamic programming problems based on recursive utility in discrete time. Under a small number of conditions, we show that the Bellman operator has a fixed point using Knaster-Tarski's fixed point theorem. We also show the fixed point of the Bellman operator can be computed by iteration from the initial function between the lower boundary and the fixed point. To show the convergence theorem, we use Tarski-Kantorovitch's fixed point theorem.
    Keywords: Recursive utility, Fixed point theorem, Dynamic programming, Bellman equation
    JEL: C61 O41
    Date: 2016–02
  4. By: Dasgupta, Utteeyo; Mani, Subha; Sharma, Smriti; Singhal, Saurabh
    Abstract: Field constraints often necessitate choosing an elicitation task that is intuitive, easy to explain, and simple to implement. Given that subject behavior often differs dramatically across tasks when eliciting risk preferences, caution needs to be exercised in choosing one risk elicitation task over another in the face of field constraints. We compare behavior in the simple most investment game (Gneezy and Potters 1997) and the ordered lottery choice game (Eckel and Grossman 2002) to evaluate whether the simpler task allows us to elicit attitudes consistent with those elicited from the ordered lottery task. Using a sample of over 2000 Indian undergraduate students, we find risk attitudes to be fairly stable across the two tasks. Our results further indicate that the consistency of risk attitudes across the tasks depends on gender of the subject, quantitative skills, father’s education level, and dispositional factors such as locus of control and Big Five personality traits.
    Keywords: Risk preferences, Experiment Design, Elicitation Methods, Personality Traits, India
    JEL: C81 C91 D81
    Date: 2016–02
  5. By: DEHEZ, P. (Université catholique de Louvain, CORE, Belgium)
    Abstract: The concept of dividend of a coalition introduced by Harsanyi in 1959 within the framework of transferable utility games is a flexible and powerful concept that can be used to characterize different solution concepts, including random order values and weighted Shapley values. Many authors have contributed to that question. Here, we offer a synthesis of their work, with a particular attention to restrictions on dividend distributions, starting with the seminal contributions of Vasil'ev (1978), Hammer, Peled and Sorensen (1977) and Derks, Haller and Peters (2000), until the recent paper of van den Brink, van der Laan and Vasil'ev (2014).
    Keywords: Harsanyi dividends, Weber set, weighted Shapley values, core
    JEL: C71
    Date: 2015–09–30
  6. By: Lorenzo Bastianello; Alain Chateauneuf
    Date: 2016–02–18
  7. By: Rangan Gupta; Shawkat Hammoudeh; Mampho P. Modise; Duc Khuong Nguyen
    Date: 2016–02–18
  8. By: Santiago Gamba Santamaría (Universidad Javeriana); Oscar Fernando Jaulín Méndez (Banco de la República de Colombia); Luis Fernando Melo Velandia (Banco de la República de Colombia); Carlos Andrés Quicazán Moreno (Banco de la República de Colombia)
    Abstract: Value at Risk (VaR) is a market risk measure widely used by risk managers and market regulatory authorities. There is a variety of methodologies proposed in the literature for the estimation of VaR. However, few of them get to say something about its distribution or its confidence intervals. This paper compares different methodologies for computing such intervals. Several methods, based on asymptotic normality, extreme value theory and subsample bootstrap, are used. Using Monte Carlo simulations, it is found that these approaches are only valid for high quantiles. In particular, there is a good performance for VaR (99%), in terms of coverage rates, and bad performance for VaR (95%) and VaR (90%). The results are confirmed by an empirical application for the stock market index returns of G7 countries. Classification JEL:C51, C52, C53, G32.
    Keywords: Value at Risk, confidence intervals, data tilting, subsample bootstrap.
    Date: 2016–02
  9. By: Ismail M.S. (GSBE)
    Abstract: We show that there are games and decision situations in which it is not possible for the decision maker to be rational a la von Neumann-Morgenstern in both situations simultaneously, which is the source of the paradox presented in this note. We provide an assumption which is the necessary and sufficient condition for a decision maker to be rational in both situations.
    Keywords: Information, Knowledge, and Uncertainty: General;
    JEL: D80
    Date: 2015

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