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on Utility Models and Prospect Theory |
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Issue of 2017‒01‒15
twelve papers chosen by |
| By: | Chakravarty, Satya R. (Asian Development Bank Institute); Chattopadhyay, Nachiketa (Asian Development Bank Institute); Silber, Jacques (Asian Development Bank Institute); Wan, Guanghua (Asian Development Bank Institute) |
| Abstract: | Given a poverty line, a person who is non-poor (poor) currently may not be treated as non-poor (poor) in a vulnerable situation. The poverty line is adjusted in the presence of vulnerability such that the utility of a person at the current poverty line and that at the adjusted poverty line become identical. Using an additive model of vulnerability, it is shown that if the utility function obeys constant Arrow-Pratt absolute risk aversion, then the harmonized poverty line is a simple absolute augmentation of the current poverty line. On the other hand, under a multiplicative model of vulnerability with constant Arrow-Pratt relative risk aversion, the revised poverty line is a simple relative augmentation of the current poverty line. Empirical illustrations assume that constant relative risk aversion applies to Asia and the Pacific. Upward adjustment of the poverty line under increased vulnerability, as captured through the value of the risk aversion parameter, is also observed. |
| Keywords: | Poverty; vulnerability; poverty line; Arrow-Pratt risk aversion |
| JEL: | D84 I32 |
| Date: | 2016–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0612&r=upt |
| By: | Enni Roukamo (Department of Economics, Oulu Business School, University of Oulu, Finland); Mikolaj Czajkowski (University of Warsaw, Department of Economics, Poland); Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews); A. Juutinen (Department of Economics, Oulu Business School, University of Oulu, Finland); R. Svento (Department of Economics, Oulu Business School, University of Oulu, Finland) |
| Abstract: | Choosing a specific heating system is a complex and difficult decision for homeowners as there exists a wide array of heating technologies with different characteristics that one can consider before purchasing. We include multiple heating technologies and attributes in our Choice Experiment design and explore the effect of perceived choice complexity on the randomness of choices. In particular, we investigate how different self-evaluated factors of choice complexity affect mean scale and scale variance. Our findings suggest that perceived choice complexity has a systematic impact on the parameters of econometric models of choice. However, there are differences between alternative selfevaluated complexity-related covariates. Results indicate that individuals who report that answering the choice tasks was difficult have less deterministic choices. Perceptions of the realism of home heating choice options also affect scale and scale variance. |
| Keywords: | Home heating, Choice experiment, Choice modelling, Scale heterogeneity, Generalized mixed logit, Complexity |
| JEL: | D12 Q40 Q48 Q51 Q55 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:2016-16&r=upt |
| By: | Niu, Cuizhen; Wong, Wing-Keung; Xu, Qunfang |
| Abstract: | This paper extends the theory between Kappa ratio and stochastic dominance (SD) and risk-seeking SD (RSD) by establishing several relationships between first- and higher-order risk measures and (higher-order) SD and RSD. We first show the sufficient relationship between the (n+1)-order SD and the n-order Kappa ratio. We then find that, in general, the necessary relationship between SD/RSD and the Kappa ratio cannot be established. Thereafter, we find that when the variables being compared belong to the same location-scale family or the same linear combination of location-scale families, we can get the necessary relationships between the (n+1)-order SD with the n-order Kappa ratio when we impose some conditions on the means. Our findings enable academics and practitioners to draw better decision in their analysis. |
| Keywords: | Stochastic Dominance, Kappa ratio, Omega Ratio, Sortino ratio, mean-risk analysis, risk aversion, risk seeking |
| JEL: | C02 D81 G10 |
| Date: | 2017–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75948&r=upt |
| By: | Kukushkin, Nikolai S. |
| Abstract: | Philip Reny's approach to games with discontinuous utility functions can work outside its original context. The existence of Nash equilibrium, as well as the possibility to approach an equilibrium with a finite individual improvement path, are established, under a condition slightly weaker than the better reply security, for three classes of strategic games: potential games, games with strategic complementarities, and aggregative games with appropriate monotonicity conditions. |
| Keywords: | better reply security; Nash equilibrium; potential game; game with strategic complementarities; aggregative game |
| JEL: | C72 |
| Date: | 2016–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75862&r=upt |
| By: | Wei Ma (International Business School Suzhou, Xi'an Jiaotong-Liverpool University, China and Department of Economics, University of Pretoria, South Africa.) |
| Abstract: | We study general equilibrium theory of complete markets in an otherwise standard economy with each household having an additive perturbed utility function. Since this function represents a type of stochastic choice theory, the equilibrium of the corresponding economy is defined to be a price vector that makes its mean expected demand equal its mean endowment. We begin with a study of the economic meaning of this notion, by showing that at any given price vector, there always exists an economy with deterministic utilities whose mean demand is just the mean expected demand of our economy with additive perturbed utilities. We then show the existence of equilibrium, its Pareto inefficiency, and the upper hemi-continuity of the equilibrium set correspondence. Specializing to the case of regular economies, we finally demonstrate that almost every economy is regular and the equilibrium set correspondence in this regular case is continuous and locally constant. |
| Keywords: | General equilibrium, Stochastic choice, Regular economy |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201701&r=upt |
| By: | Halevy, Yoram; Persitz, Dotan; Zrill, Lanny |
| Abstract: | Revealed preference theory is brought to bear on the problem of recovering approximate parametric preferences from consistent and inconsistent consumer choices. We propose measures of the incompatibility between the revealed preference ranking implied by choices and the ranking induced by the considered parametric preferences. These incompatibility measures are proven to characterize well-known inconsistency indices. We advocate a recovery approach that is based on such incompatibility measures, and demonstrate its applicability for misspecification measurement and model selection. Using an innovative experimental design we empirically substantiate that the proposed revealed-preference-based method predicts choices significantly better than a standard distance-based method. |
| Keywords: | Revealed Preference, Recoverability, Identification, Non-COnvex Preferences, Pairwise Choice, First-Order Risk Aversion, Portfolio Choice, Laboaratory |
| JEL: | C00 C18 C91 D00 D11 D81 G11 |
| Date: | 2016–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:yoram_halevy-2016-11&r=upt |
| By: | Barrot, Jean-Noël; Loualiche, Erik; Sauvagnat, Julien |
| Abstract: | We investigate how globalization is reflected in asset prices. We use shipping costs to measure firms' exposure to globalization. Firms in low shipping cost industries carry a 8 percent risk premium, suggesting that their cash-flows covary negatively with investors' marginal utility. We find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. These findings suggest that foreign productivity shocks are associated with times when consumption is dear for investors. We discuss conditions under which a standard model of trade with asset prices can rationalize this puzzle. |
| JEL: | F11 F4 G14 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11733&r=upt |
| By: | Jacopo Bonan (Fondazione Eni Enrico Mattei (FEEM)); Philippe LeMay-Boucher (Heriot-Watt University); Douglas Scott (The University of Nottingham) |
| Abstract: | This paper estimates time preference parameters using commonly-applied methodologies, with the aim of investigating the link between these measures and actual economic behaviour. An experiment was conducted in the city of Thies, in Senegal, using the unique reference numbers of banknotes as a means of determining an individual’s willingness to save money. The findings of this experiment provide an innovative comparison between real choices, and choices made in the presence of hypothetical rewards. Our research indicates that individuals display a far greater degree of patience, when the possibility of genuine financial gain is made available to them. Our results show that hypothetical time preferences parameters are poor predictors of actual behaviour, prompting questions over the validity of commonly used measurements. |
| Keywords: | Time Preferences, Randomized Experiment, Senegal |
| JEL: | D01 D91 C93 O1 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2016.74&r=upt |
| By: | Tristan Le Cotty; Elodie Maitre d'Hotel; Raphael Soubeyran; Julie Subervie |
| Abstract: | This paper investigates whether Burkinabe maize farmers’ fertilizer-use decisionsare correlated with their risk and time preferences. We conducted a survey and a se-ries of hypothetical experiments on a sample of 1,500 farmers. We find that morepatient farmers do use more fertilizer, but it is only because they plant more maize (afertilizer-intensive crop) rather than because they use more fertilizer per hectare ofmaize planted. Conversely, we find no statistically significant link between risk aver-sion and fertilizer use. We use a simple two-period model, which suggests that riskaversion may indeed have an ambiguous effect on fertilizer use. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:17-01&r=upt |
| By: | Briones, Roehlano M. |
| Abstract: | Inadequate application of nitrogen (N) fertilizer has been identified by the Food Staples Sufficiency Program as a major constraint in achieving rice self-sufficiency. The available literature on fertilizer application in the Philippines tends to find inadequate N application under the agronomic and economic criteria. Explanations for the gap may be grouped under the following sets of factors: external constraints, attitude toward risk, and internal constraints. Different explanations imply different policy solutions, hence, it is critical to correctly identify the most relevant explanations. A new estimation using FAO Fertibase data confirms the finding of inadequate N application by rice farmers in the Philippines. Additional study is proposed covering the following: (1) comparing actual to optimal N application using secondary data for Central Luzon (obtained from the International Rice Research Institute) and (2) identifying the reasons for inadequate N application using primary data collected from a survey of rice farmers in Nueva Ecija. |
| Keywords: | Philippines, efficiency, fertilizer, yield gap, risk aversion, prospect theory, behavioral economics |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2016-01&r=upt |
| By: | Gabaix, Xavier |
| Abstract: | This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model - with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or "helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduce its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model helps solve the "forward guidance puzzle" : the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation: because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands "nominal GDP targeting" ; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic firms. (vi) The model is "neo-Fisherian" in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by the extant empirical evidence. |
| Keywords: | behavioral macroeconomics; bounded rationality; forward guidance; price level targetting; zero lower bound |
| JEL: | D03 E03 E12 E52 E6 E62 E63 G02 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11729&r=upt |
| By: | Andrey Itkin |
| Abstract: | It is known that the implied volatility skew of FX options demonstrates a stochastic behavior which is called stochastic skew. In this paper we create stochastic skew by assuming the spot/instantaneous variance correlation to be stochastic. Accordingly, we consider a class of SLV models with stochastic correlation where all drivers - the spot, instantaneous variance and their correlation are modeled by Levy processes. We assume all diffusion components to be fully correlated as well as all jump components. A new fully implicit splitting finite-difference scheme is proposed for solving forward PIDE which is used when calibrating the model to market prices of the FX options with different strikes and maturities. The scheme is unconditionally stable, of second order of approximation in time and space, and achieves a linear complexity in each spatial direction. The results of simulation obtained by using this model demonstrate capacity of the presented approach in modeling stochastic skew. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1701.02821&r=upt |