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on Utility Models and Prospect Theory |
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Issue of 2017‒03‒19
fourteen papers chosen by |
| By: | Guo, Xu; Wagener, Andreas; Wong, Wing-Keung; Zhu, Lixing |
| Abstract: | With multiple additive risks, the mean-variance approach and the expected-utility approach of risk preferences are compatible if all attainable distributions belong to the same location-scale family. Under this proviso, we survey existing results on the parallels of the two approaches with respect to risk attitudes, the changes thereof, and the comparative statics for simple, linear choice problems under risks. In mean-variance approach all effects can be couched in terms of the marginal rate of substitution between mean and variance. We provide some simple proofs of some previous results. We apply the theory we stated or developed in our paper to study the behavior of banking firm and study risk taking behavior with background risk in the mean-variance model. |
| Keywords: | Mean-variance model; location-scale family; background risk; multiple additive risks; expected-utility approach |
| JEL: | C0 D81 G11 |
| Date: | 2017–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77625&r=upt |
| By: | Michela Faccioli (The James Hutton Institute, Social, Economic and Geographical Sciences Group); Laure Kuhfuss (The James Hutton Institute, Social, Economic and Geographical Sciences Group; University of St. Andrews, Department of Geography and Sustainable Development); Mikołaj Czajkowski (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | The outcome of a conservation policy is often subject to uncertainty. In stated preference valuation, there is increasing recognition that uncertainty affects preferences for environmental policies. However, there is also poor understanding regarding people’s perception of uncertainty per se and risk attitude. To shed more light on this, we designed a discrete choice experiment and compared preferences for environmental outcomes under climate change across two split samples, each confronted with a scenario where environmental outcomes are presented as either certain or uncertain (i.e. probabilistically) but displaying the same expected results. We find that, for an equal expected outcome, preferences vary between the certain and the uncertain treatment. These results indicate that risk attitudes impact stated preferences for conservation policies under uncertainty and reinforce the idea that uncertainty should be included in stated preference studies to provide more accurate and policy relevant results. Interestingly, we additionally find that risk attitudes appear to be both context- and individual- specific – the effect of uncertainty depends on the magnitude and direction of change of the environmental good and on individual’s socio-demographic characteristics. |
| Keywords: | Stated preference valuation; uncertainty; risk attitude; climate change; conservation |
| JEL: | D6 D81 Q20 Q51 Q54 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2017-07&r=upt |
| By: | Ahlheim, Michael; Frör, Oliver; Nguyen Minh Duc; Rehl, Antonia; Siepmann, Ute; Pham Van Dinh |
| Abstract: | In Stated Preference studies for the appraisal of environmental projects in poor countries or regions it often turns out that the stated willingness to pay of people for environmental improvements, which is used as measure of individual welfare changes, is very low. This is often interpreted as the result of extremely tight budget constraints, which make it impossible that people express their true appreciation of an environmental project in terms of their willingness to pay for it. Therefore, it is sometimes suggested to use labour contributions instead of money as a numeraire to measure utility in such studies. In this paper we show theoretically and empirically that this suggestion is not compatible with the principles of welfare theory because of several inconsistencies. We also illustrate the validity of our arguments empirically based on the results of a Contingent Valuation study conducted in a rural area in northern Vietnam. |
| Keywords: | Contingent Valuation,Cost-benefit Analysis,Developing Countries,Public Expenditures,Vietnam,Willingness to work |
| JEL: | D61 H43 Q51 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hohdps:032017&r=upt |
| By: | Hetschko, Clemens; Preuß, Malte |
| 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. |
| JEL: | D81 J64 J65 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145491&r=upt |
| By: | Pivato, Marcus; Vergopoulos, Vassili |
| Abstract: | In many decisions under uncertainty, there are technological constraints on both the acts an agent can perform and the events she can observe. To model this, we assume that the set S of possible states of the world and the set X of possible outcomes each have a topological structure. The only feasible acts are continuous functions from S to X, and the only observable events are regular open subsets of S. In this environment, we axiomatically characterize a Subjective Expected Utility (SEU) representation of preferences over acts, involving a continuous utility function on X (unique up to positive affine transformations), and a unique probability measure on a Boolean algebra B of regular open subsets of S. With additional topological hypotheses, we obtain a unique Borel probability measure on S, along with an auxiliary apparatus called a liminal structure, which describes the agent’s informational constraints. We also obtain SEU representations involving subjective state spaces, such as the Stone-Čech compactification of S and the Stone space of B. |
| Keywords: | Subjective expected utility; topological space; technological feasibility; continuous utility; regular open set; Borel measure. |
| JEL: | D81 |
| Date: | 2017–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77359&r=upt |
| By: | Costanigro, Marco; Scozzafava, Gabriele; Casini, Leonardo |
| Abstract: | We conduct a choice experiment where the number of labels vertically differentiating Chianti wines (Chianti, Chianti Classico, Chianti Classico Riserva, Chianti Classico Gran Selezione) is augmented incrementally in a between-subject design, eliciting both quality perceptions and wine choices. We find that quality expectations are endogenous to the labeling regime, and adding a high-quality label (e.g., Chianti Gran Selezione) decreases the perceived quality of all other Chianti wines (comparative stigma). A model conditioning on subjective quality perceptions with heterogeneous WTP for quality is then proposed, and estimated via random parameter multinomial logit. The endogeneity problem arising from using subjective beliefs as regressors is addressed by means of a control-function approach. Results are compared to reduced form approaches where the marginal utility of quality and subjective perceptions are confounded in a single label-specific estimate, and the model is used to determine how much of the cannibalization observed after introducing higher-tier quality standards is attributable to restructuring of perceptions and comparative stigma. |
| Keywords: | Industrial Organization, Marketing, |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aawewp:253850&r=upt |
| By: | Kollmann, Robert |
| Abstract: | The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-traded-good, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks.Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively. |
| Keywords: | international business cycle synchronization, recursive preferences, terms of trade, real exchange rate, wealth effect on labor supply |
| JEL: | E32 F31 F32 F36 F41 F43 F44 F47 |
| Date: | 2017–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77558&r=upt |
| By: | Dmitry Muravey |
| Abstract: | This paper studies an optimal investment problem under M-CEV with power utility function. Using Laplace transform we obtain explicit expression for optimal strategy in terms of confluent hypergeometric functions. For obtained representations we derive asymptotic and approximation formulas contains only elementary functions and continued fractions. These formulas allow to make analysis of impact of model's parameters and effects of parameters misspecification. In addition we propose some extensions of obtained results that can be applicable for pair trading algorithmic strategies. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1703.01574&r=upt |
| By: | Nicole B\"auerle; Stefanie Grether |
| Abstract: | We consider a Bayesian financial market with one bond and one stock where the aim is to maximize the expected power utility from terminal wealth. The solution of this problem is known, however there are some conjectures in the literature about the long-term behavior of the optimal strategy. In this paper we prove now that for positive coefficient in the power utility the long-term investor is very optimistic and behaves as if the best drift has been realized. In case the coefficient in the power utility is negative the long-term investor is very pessimistic and behaves as if the worst drift has been realized. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1703.04423&r=upt |
| By: | Martin Glanzer; Georg Ch. Pflug |
| Abstract: | Optimal bid and ask prices for contingent claims can be found by mathematical optimization. To do so, a model for the market dynamics is needed. While the traditional replication or superreplication strategies find the optimal prices under the constraint that all risks are shifted to the counterparty, we weaken this assumption here by introducing risk (resp. acceptability) functionals in the stochastic optimization framework. Moreover, we consider the associated ambiguity problem, where we replace the single probability model by a non-parametric set of models. We show that weakening the acceptability constraint leads to a shrinking bid-ask spread while considering model ambiguity makes the bid-ask spread even larger. Some algorithms and numerical examples are presented. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1703.05709&r=upt |
| By: | Felix-Benedikt Liebrich; Gregor Svindland |
| Abstract: | We show how risk measures originally defined in a model free framework in terms of acceptance sets and reference assets imply a meaningful underlying probability structure. Hereafter we construct a maximal domain of definition of the risk measure respecting the underlying ambiguity profile. We particularly emphasise liquidity effects and discuss the correspondence between properties of the risk measure and the structure of this domain as well as subdifferentiability properties. Keywords: Model free risk assessment, extension of risk measures, continuity properties of risk measures, subgradients. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1703.01137&r=upt |
| By: | Kalmbach, Bettina |
| Abstract: | In the light of irrational behaviour and decision biases leading people to commit systematic blunders, Thaler and Sunstein (2003) presented in their approach of libertarian paternalism the concept of choice architecture, to face the problem of wrong decisionmaking and resulting welfare losses by "Nudging" irrational agents. The debate about this approach focuses on its compatibility with libertarian principles, on its welfare-enhancing character and on the knowledge problem about peoples' true preferences. The goal of this paper is to show in part I that with recourse to contract theory, applied constitutional economics provides a justification of both the libertarian character and the profitability of libertarian paternalism. The use of libertarian paternalistic policies for environmental in particular to promote the acceptance and purchase of climate-friendly and sustainable LED bulbs can be justified as a selfbinding commitment induced by hierarchical preferences for sustainability. Referring to the Condorcet Jury Theorem, stating that 1) an expert jury is always more competent than a single expert and that 2) for large juries, group competence tends to infallibility with an increase in group size, libertarian paternalism for ecological goals can be defended against the knowledge problem. In part II an extension of the Condorcet Jury Theorem relaxing its restrictive assumptions of binary choice, homogeneous and independent voters, investigates its applicability and reliability for paternalistic interventions and allows a new perspective in the debate of choice framing paternalism, namely the concept of "social nudging" to promote social long-term goals. This paper provides an approach of effective choice framing by applying the CJT and implementing expert juries with the subsidiary principle. It investigates with regard to the support of sustainable "lightconsumption" how far institutions should go in shaping choice situations of consumers to promote their welfare. |
| JEL: | B13 D03 D60 H10 Q20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cenwps:042016&r=upt |
| By: | Neugart, Michael |
| Abstract: | For standard economic models it is typically assumed that preferences are given and stable. But do economic systems shape individuals' risk preferences? Using the reunification of East and West Germany as a natural experiment I evaluate differences in financial risk taking comparing Eastern and Western German households for almost two decades after the fall of the Berlin Wall. Controlling for a large set of socio-economic variables East Germans having been ``treated'' by a command economy were more prone to taking financial risk than West German citizens. The differences were quantitatively relevant after the fall of the Iron Curtain and almost vanished by 2008. |
| JEL: | D14 G11 P50 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145475&r=upt |
| By: | Fels, Markus |
| Abstract: | Consumers frequently overinsure modest risks. I argue that confining consumers' insurance motives to a single motive - risk aversion - is responsible for the difficulty to rationalize this behavior. People who perform mental accounting have an additional motive for buying insurance. They perceive a risk of having insufficient means to self-insure. This complements behavioral approaches to explain the profitability of warranties and the dislike of deductibles. It accounts for several empirical regularities that are difficult to reconcile within existing models. Finally, it suggests that the way in which an insurer pays benefits influences the value and the cost of insurance. |
| JEL: | D11 D14 D81 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145489&r=upt |