
on Utility Models and Prospect Theory 
By:  Shaolin Ji; Xiaomin Shi 
Abstract:  This paper concerns the recursive utility maximization problem. We assume that the coefficients of the wealth equation and the recursive utility are concave. Then some interesting and important cases with nonlinear and nonsmooth coefficients satisfy our assumption. After given an equivalent backward formulation of our problem, we employ the FenchelLegendre transform and derive the corresponding variational formulation. By the convex duality method, the primal "supinf" problem is translated to a dual minimization problem and the saddle point of our problem is derived. Finally, we obtain the optimal terminal wealth. To illustrate our results, three cases for investors with ambiguity aversion are explicitly worked out under some special assumptions. 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1607.00721&r=upt 
By:  Adriaan R. Soetevent (University of Groningen, The Netherlands); Tadas Bruzikas (University of Groningen, The Netherlands) 
Abstract:  Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains. 
Keywords:  consumer search; risk aversion; loss aversion; price uncertainty 
JEL:  D11 D12 D83 M31 
Date:  2016–07–04 
URL:  http://d.repec.org/n?u=RePEc:tin:wpaper:20160049&r=upt 
By:  Ying Jiao (ISFA); Idris Kharroubi (CREST, CEREMADE) 
Abstract:  We study an optimal investment problem under default risk where related information such as loss or recovery at default is considered as an exogenous random mark added at default time. Two types of agents who have different levels of information are considered. We first make precise the insider's information flow by using the theory of enlargement of filtrations and then obtain explicit logarithmic utility maximization results to compare optimal wealth for the insider and the ordinary agent. MSC: 60G20, 91G40, 93E20 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1607.02743&r=upt 
By:  Memmel, Christoph; Seymen, Atılım; Teichert, Max 
Abstract:  We investigate German banks' exposure to interest rate risk. In finance, higher demand for a risky asset is typically associated with higher expected return. However, employing a utility function which implies both riskaverse and riskseeking behavior depending on the level of profits, we show that this relationship may get weaker and even change its sign at low profit levels. For the period 20052014, we find not only the common positive relationship of higher expected returns and rising interest rate exposure but also that this relationship does become weaker with falling operative income, its sign eventually changing. 
Keywords:  banks' risk taking,exposure to interest rate risk,low interest rate environment 
JEL:  G11 G21 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:zbw:bubdps:222016&r=upt 
By:  Klaus Wälde (Johannes GutenbergUniversity Mainz); Agnes Moors (KU Leuven) 
Abstract:  Positive and negative feelings were central to the development of economics, especially in utility theory in classical economics. While neoclassical utility theory ignored feelings, behavioral economics more recently reintroduced feelings in utility theory. Beyond feelings, economic theorists use fullfledged specific emotions to explain behavior that otherwise could not be understood or they study emotions out of interest for the emotion itself. While some analyses display a strong overlap between psychological thinking and economic modelling, in most cases there is still a large gap between economic and psychological approaches to emotion research. Ways how to reduce this gap are discussed. 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:jgu:wpaper:1612&r=upt 
By:  Bertoli, Simone (CERDI, University of Auvergne); FernándezHuertas Moraga, Jesús (Universidad Carlos III de Madrid); Keita, Sekou (CERDI, University of Auvergne) 
Abstract:  The effect of immigration on host and origin countries is mediated by the way migrants take their labor supply decisions. We propose a simple way of integrating the traditional random utility maximization model used to analyze location decisions with a classical labor demand function at destination. Our setup allows us to estimate a general upper bound on the elasticity of the migrant labor supply that we take to the data using the evolution of the numbers and wages of temporary overseas Filipino workers between 1992 and 2009 to different destinations. We find that the migrant labor supply elasticity can be very large. Temporary migrants are very reactive to economic conditions in their potential destinations. 
Keywords:  labor supply elasticity, temporary migration, international migration, multilateral resistance to migration 
JEL:  F22 J31 J38 J61 O15 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:iza:izadps:dp10031&r=upt 
By:  Andreas Eichler; Gunther Leobacher; Michaela Sz\"olgyenyi 
Abstract:  We propose a model for an insurance loss index and the claims process of a single insurance company holding a fraction of the total number of contracts that captures both ordinary losses and losses due to catastrophes. In this model we price a catastrophe derivative by the method of utility indifference pricing. The associated stochastic optimization problem is treated by techniques for piecewise deterministic Markov processes. A numerical study illustrates our results. 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1607.01110&r=upt 
By:  Ghassan, Hassan B. 
Abstract:  The novelty of Shibani’s earning model is its integration of Zakat and other social giving in the social welfare function, which makes the consumer utility a multidimensional devotional, material, ethical, social, Shariahcompliant function. In the model, the consumer’s income evolves increasingly from imperative earning that covers consumer’s basic needs, to recommended earning that covers basic needs of relatives; and to permissible earning that covers the poor’s needs. Accordingly, the model has imperative, recommended, and permissible utility. The rich consumer draws additional utility from Zakat spending in favor of the poor consumers. Based on the social solidarity, we show that the marginal earning depends on the first difference between the MPC of lower and upper social groups. The permissible marginal utility is related to the faith interaction and enhances the social utility as social transfer is paid to poor and needy groups. 
Keywords:  consumer, faith, Zakah, imperative, recommended, permissible, earning, spending, utility. 
JEL:  D1 D6 I3 P46 
Date:  2015–06–11 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:72441&r=upt 
By:  Yuki Shigeta 
Abstract:  In this paper, we study optimal switching problems under ambiguity. To characterize the optimal switching under ambiguity in the finite horizon, we use multidimensional reflected backward stochastic differential equations (multidimensional RBSDEs) and show that a value function of the optimal switching under ambiguity coincides with a solutions to multidimensional RBSDEs with allowing negative switching costs. Furthermore, we naturally extend the finite horizon problem to the infinite horizon problem. In some applications, we show that ambiguity affects an optimal switching strategy with the different way to a usual switching problem without ambiguity. 
Keywords:  Optimal Switching, Ambiguity Aversion, Reflected Backward Stochastic Differential Equation, Viscosity Solution. 
Date:  2016–07 
URL:  http://d.repec.org/n?u=RePEc:kue:epaper:e16005&r=upt 
By:  Ronayne, David & Brown, Gordon D.A. (Department of Economics, University of Warwick & Department of Psychology, University of Warwick) 
Abstract:  Consumers' choices are typically influenced by choice context in ways that standard models cannot explain. We provide a concise explanation of the attraction, compromise and similarity effects. Value is assumed to be determined by simple dominance relations between choice options and sampled comparators, and selection of comparators is assumed to be systematically influenced by the choice options. In one experiment, participants viewed differing selections of market options prior to choice. The classic context effects appeared and disappeared as predicted. In the second experiment, individuals' sampling distributions of market options were influenced by the choice set as predicted by the model. 
Keywords:  consumer choice; decisionmaking; context effects; sampling. 
JEL:  I30 I31 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:wrk:warwec:1124&r=upt 
By:  Oriana Bandiera; Luigi Guiso; Andrea Prat; Raffaella Sadun 
Abstract:  We exploit a unique combination of administrative sources and survey data to study the match between firms and managers. The data includes manager characteristics, such as risk aversion and talent; firm characteristics, such as ownership; detailed measures of managerial practices relative to incentives, dismissals and promotions; and measurable outcomes, for the firm and for the manager. A parsimonious model of matching and incentive provision generates an array of implications that can be tested with our data. Our contribution is twofold. We disentangle the role of riskaversion and talent in determining how firms select and motivate managers. In particular, riskaverse managers are matched with firms whose compensation scheme depends less on performance. We also show that empirical findings linking governance, incentives, and performance that are typically observed in isolation, can instead be interpreted within a simple unified matching framework. 
JEL:  N0 
Date:  2015–07 
URL:  http://d.repec.org/n?u=RePEc:ehl:lserod:57271&r=upt 
By:  Johan G. Andreasson; Pavel V. Shevchenko; Alex Novikov 
Abstract:  In this paper, we develop an expected utility model for the retirement behavior in the decumulation phase of Australian retirees with sequential family status subject to consumption, housing, investment, bequest and government provided meanstested Age Pension. We account for mortality risk and risky investment assets, and introduce a health proxy to capture the decreasing level of consumption for older retirees. Then we find optimal housing at retirement, and optimal consumption and optimal risky asset allocation depending on age and wealth. The model is solved numerically as a stochastic control problem, and is calibrated using the maximum likelihood method on empirical data of consumption and housing from the Australian Bureau of Statistics 20092010 Survey. The model fits the characteristics of the data well to explain the behavior of Australian retirees. The key findings are the following: First, the optimal policy is highly sensitive to meanstested Age Pension early in retirement but this sensitivity fades with age. Secondly, the allocation to risky assets shows a complex relationship with the meanstested Age Pension that disappears once minimum withdrawal rules are enforced. As a general rule, when wealth decreases the proportion allocated to risky assets increases, due to the Age Pension working as a buffer against investment losses. Finally, couples can be more aggressive with risky allocations due to their longer life expectancy compared with singles. 
Date:  2016–06 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1606.08984&r=upt 