nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2017‒04‒16
25 papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Risk Aversion as a Perceptual Bias By Khaw, Mel Win; Li, Ziang; Woodford, Michael
  2. Pre-Decision Side-Bet Sequences By Kim Kaleva Kaivanto; David Alan Peel
  3. Economics and psychology. The framing of decisions By Schilirò, Daniele
  4. Back to Bentham, Should We? Large-Scale Comparison of Experienced versus Decision Utility By Akay, Alpaslan; Bargain, Olivier B.; Jara, H. Xavier
  5. Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel By Kollmann, Robert
  6. Consistent Utility of Investment and Consumption : a forward/backward SPDE viewpoint * By Nicole El Karoui; Caroline Hillairet; Mohamed Mrad
  7. Fair Utilitarianism By Marc Fleurbaey; Stephane Zuber
  8. Sharp Target Range Strategies with Application to Dynamic Portfolio Selection By Rongju Zhang; Nicolas Langren\'e; Yu Tian; Zili Zhu; Fima Klebaner; Kais Hamza
  9. Rational Choice and Artificial Intelligence By Tshilidzi Marwala
  10. Informal Risk-Sharing Cooperatives: The Effect of Learning and Other-Regarding Preferences By Victorien Barbet; Renaud Bourlès; Juliette Rouchier
  11. Can Gender Differences in Distributional Preferences Explain Gender Gaps in Competition? By Mani, Subha; Dasgupta, Utteeyo; Sharma, Smriti; Singhal, Saurabh
  12. Uncertainty shocks, asset supply and pricing over the business cycle By Bianchi, Francesco; Ilut, Cosmin; Schneider, Martin
  13. Social Network Structure and The Trade-Off Between Social Utility and Economic Performance By Katarzyna Growiec; Jakub Growiec; Bogumil Kaminski
  14. Rationalizability of Menu Preferences By Christopher J. Tyson
  15. Reinterpreting the mutual fund theorem: the risk portfolio as a tactical overlay By Tenani, Paulo Sérgio
  16. Individual Characteristics, Behavioral Biases, and Attitudes toward Immigration: Evidence from a survey in Japan By TOMIURA Eiichi; ITO Banri; MUKUNOKI Hiroshi; WAKASUGI Ryuhei
  17. Risk Attitudes and Household Migration Decisions By Dustmann, Christian; Fasani, Francesco; Meng, Xin; Minale, Luigi
  18. Volatility risk premia and future commodities returns By José Renato Haas Ornelas; Roberto Baltieri Mauad
  19. Mostly Prior-Free Asset Allocation By Sylvain Chassang
  20. Risk Premium Shifts and Monetary Policy: A Coordination Approach By Stephen Morris; Hyun Song Shin
  21. Optimal Clean Energy R&D Investments Under Uncertainty By Giacomo Marangoni; Gauthier De Maere; Valentina Bosetti
  22. Humans' (incorrect) distrust of reflective decisions By Cabrales, Antonio; Espin, Antonio; Kujal, Praveen; Rassenti, Stephen
  23. To stay or go? Consumer bank switching behaviour after government interventions By Maaike Diepstraten; Carin van der Cruijsen
  24. Informationally Robust Optimal Auction Design By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  25. Impacts of OPEC's political risk on the international crude oil prices: An empirical analysis based on the SVAR models By Hao Chen; Hua Liao; Bao-Jun Tang; Yi-Ming Wei

  1. By: Khaw, Mel Win; Li, Ziang; Woodford, Michael
    Abstract: The theory of expected utility maximization (EUM) explains risk aversion as due to diminishing marginal utility of wealth. However, observed choices between risky lotteries are difficult to reconcile with EUM: for example, in the laboratory, subjects' responses on individual trials involve a random element, and cannot be predicted purely from the terms offered; and subjects often appear to be too risk averse with regard to small gambles (while still accepting sufficiently favorable large gambles) to be consistent with any utility-of-wealth function. We propose a unified explanation for both anomalies, similar to the explanation given for related phenomena in the case of perceptual judgments: they result from judgments based on imprecise (and noisy) mental representation of the decision situation. In this model, risk aversion is predicted without any need for a nonlinear utility-of-wealth function, and instead results from a sort of perceptual bias --- but one that represents an optimal Bayesian decision, given the limitations of the mental representation of the situation. We propose a specific quantitative model of the mental representation of a simple lottery choice problem, based on other evidence regarding numerical cognition, and test its ability to explain the choice frequencies that we observe in a laboratory experiment.
    Keywords: Bayesian decision theory; diminishing sensitivity; prospect theory; Rabin critique; Weber's Law
    JEL: C91 D03 D81 D87
    Date: 2017–03
  2. By: Kim Kaleva Kaivanto; David Alan Peel
    Abstract: Risk-averse Expected Utility (EU) decision makers with wealth-dependent utility functions may find themselves indifferent between accepting and rejecting an indivisible risky prospect. Bell (1988) showed that under these circumstances it is EU-enhancing for the decision maker to engage in a pre-decision side bet, accepting the indivisible risky prospect conditional upon winning the side bet. The side bet places the decision maker on the convex hull between the initial-wealth utility function and the utility function with risky-prospect-augmented wealth. We show that decision makers restricted to actuarially unfair side bets engage in a sequence of individually EU-enhancing side bets. This occurs because optimal stake size is modest for actuarially unfair side bets, whereby wealth remains within the interval of interim convexity upon losing the side bet. As optimal stake size falls strongly with each successive side-bet round, wealth remains within the interval of interim convexity. The EU enhancement conferred by each successive round is also strongly diminishing. Hence the side-bet sequence is eventually truncated when no further EU enhancement is available.
    Keywords: Expected Utility, risk aversion, side bets, rationality, indivisibility, discreteness, actuarial fairness
    JEL: D81
    Date: 2017
  3. By: Schilirò, Daniele
    Abstract: In the Theory of Rational Decision Making the psychological aspects are set aside. This contribution seeks to point out the relevance of psychology into economic decisions. The essay treats the "framing of decisions", which is a pillar of Kahneman's behavioral theory. Framing must be considered a special case of the more general phenomenon of dependency from the representation. The best-known risky choice-framing problem, i.e. the "Asian Disease Problem", is shown where an essential aspect of rationality: invariance, is violated. In addition, the contribution explains Kahneman and Tversky's Prospect Theory and illustrates their value function. Finally, it discusses the reversals of preference in framing and framing of contingencies. The framing manipulation is viewed as a public tool for influencing the decision maker's private framing of the problem in terms of gains or losses, which determines the decision maker's evaluation of the options. In conclusion, the psychology of choice is relevant both for the descriptive question of how decisions are made and for the normative question of how decisions ought to be made.
    Keywords: Behavioral Economics; Framing of Decisions; Prospect Theory; Daniel Kahneman.
    JEL: D01 D03 D81
    Date: 2016–12
  4. By: Akay, Alpaslan; Bargain, Olivier B.; Jara, H. Xavier
    Abstract: Subjective well-being (SWB) data is increasingly used to perform welfare analyses. In- terpreted as 'experienced utility', SWB has recently been compared to 'decision utility' using specific experiments, most often based on stated preferences. Results point to an overall congruence between these two types of welfare measures. We question whether these findings hold in the more general framework of non-experimental and large-scale data, i.e. the setting commonly used for policy analysis. For individuals in the British household panel, we compare the ordinal preferences either "revealed" from their labor supply decisions or elicited from their reported SWB. The results show striking similari- ties on average, reflecting the fact that a majority of individuals made decisions that are consistent with SWB maximization. Di¤erences between the two welfare measures arise for particular subgroups, lending themselves to intuitive explanations that we illustrate for specific factors (health and labor market constraints, 'focusing illusion', aspirations).
    Keywords: decision utility,experienced utility,labor supply,subjective well-being
    JEL: C90 I31 J22
    Date: 2017
  5. By: Kollmann, Robert (Université Libre de Bruxelles)
    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 commove positively.
    JEL: F31 F32 F36 F41 F43
    Date: 2017–03–01
  6. By: Nicole El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique); Caroline Hillairet (ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Mohamed Mrad (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8, Vincennes-Saint-Denis - Université Paris 13 - USPC - Université Sorbonne Paris Cité - Institut Galilée - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides an extension of the notion of consistent progressive utilities U to consistent progressive utilities of investment and consumption (U, V). It discusses the notion of market consistency in this forward framework, compared to the classic backward setting with a given terminal utility, and whose value function is an example of such consistent forward utility. To ensure the consistency with the market model or a given set of test processes, we establish a stochastic partial differential equation (SPDE) of Hamilton-Jacobi-Bellman (HJB)-type that U has to satisfy. This SPDE highlights the link between the utility of wealth U and the utility of consumption V, and between the drift and the volatility characteristics of the utility U. By associating with the HJB-SPDE two SDEs, we discuss the existence and the uniqueness of a concave solution. Finally, we provide explicit regularity conditions and characterize the consistent pairs of consistent utilities of investment and consumption. Some examples, such as power utilities, illustrate the theory.
    Keywords: Market-consistent progressive utility of investment and consumption,Forward/backward stochastic partial differential equation (SPDE)
    Date: 2017–02–06
  7. By: Marc Fleurbaey (Princeton University); Stephane Zuber (Paris School of Economics)
    Abstract: Utilitarianism is a prominent approach to social justice that has played a central role in economic theory. A key issue for utilitarianism is to define how utilities should be measured and compared. This paper draws on Harsanyi’s approach (Harsanyi, 1955) to derive utilities from choices in risky situations. We introduce a new normalization of utilities that ensures that: 1) a transfer from a rich to a poor is welfare enhancing, and 2) populations with more risk averse people have lower welfare. We propose normative principles that reflect these fairness requirements and characterize fair utilitarianism. We also study some implications of fair utilitarianism for risk sharing and collective risk aversion.
    Keywords: Fairness, utilitarianism, risk sharing, collective risk aversion
    JEL: D63 D81
    Date: 2017–01
  8. By: Rongju Zhang; Nicolas Langren\'e; Yu Tian; Zili Zhu; Fima Klebaner; Kais Hamza
    Abstract: A family of sharp target range strategies is presented for portfolio selection problems. Our proposed strategy maximizes the expected portfolio value within a target range, composed of a conservative lower target representing capital guarantee and a desired upper target representing investment goal. This strategy favorably shapes the entire probability distribution of return, as it simultaneously seeks a high expected return, cuts off downside risk, and implicitly caps volatility, skewness and other higher moments of the return distribution. To illustrate the effectiveness of our new investment strategies, we study a multi-period portfolio selection problem with transaction cost, where the results are generated by the Least-Squares Monte-Carlo algorithm. Our numerical tests show that the presented strategy produces a better efficient frontier, a better trade-off between return and downside risk, and a wider range of possible risk profiles than classical constant relative risk aversion utility. Finally, straightforward extensions of the sharp target range are presented, such as purely maximizing the probability of achieving the target range, adding an explicit target range for realized volatility, and defining the range bounds as excess return over a stochastic benchmark, for example, stock index or inflation rate. These practical extensions make the approach applicable to a wide array of investment funds, including pension funds, controlled-volatility funds, and index-tracking funds.
    Date: 2017–04
  9. By: Tshilidzi Marwala
    Abstract: The theory of rational choice assumes that when people make decisions they do so in order to maximize their utility. In order to achieve this goal they ought to use all the information available and consider all the choices available to choose an optimal choice. This paper investigates what happens when decisions are made by artificially intelligent machines in the market rather than human beings. Firstly, the expectations of the future are more consistent if they are made by an artificially intelligent machine and the decisions are more rational and thus marketplace becomes more rational.
    Date: 2017–03
  10. By: Victorien Barbet (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Renaud Bourlès (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Juliette Rouchier (LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We study the dynamics of risk-sharing cooperatives among heterogeneous agents. Based of their knowledge on their risk exposure and the performance of the cooperatives, agents choose whether or not to remain in the risk-sharing agreement. We highlight the key role of other-regarding preferences, both altruism and inequality aversion, in stabilizing less segregated (and smaller) cooperatives. Limited knowledge and learning of own risk exposure also contributes to reducing segregation. Our finding shed light on the mechanisms behind risk-sharing agreements between agents heterogeneous in their risk exposure.
    Keywords: agent-Based,cooperative,risk-sharing,learning,altruism,other-regarding preferences
    Date: 2017–02
  11. By: Mani, Subha (Fordham University); Dasgupta, Utteeyo (Fordham University); Sharma, Smriti (UNU-WIDER); Singhal, Saurabh (UNU-WIDER)
    Abstract: We design an experiment to examine whether egalitarian preferences, and in particular, behindness aversion as well as preference for favorable inequality affect competitive choices differently among males and females. We find that selection into competitive environments is: (a) negatively related to egalitarian preferences, with smaller negative impacts of being egalitarian on females' choice of the tournament wage scheme, and (b) negatively associated with behindness aversion and positively related to preference for favorable inequality, with significant gender differences in the impact of these distributional preferences. Once we allow for the impact of distributional preferences, behavioral, personality, and socioeconomic characteristics to vary by gender, the pure gender effect is explained away. We find that gender gaps in distributional preferences along with selected personality traits are the most relevant explanations for gender differences in willingness to compete. This is an important result as these characteristics are per se malleable and amenable to policy interventions.
    Keywords: competitiveness, distributional preferences, gender differences
    JEL: C91 D03 D63 J16
    Date: 2017–03
  12. By: Bianchi, Francesco; Ilut, Cosmin; Schneider, Martin
    Abstract: This paper estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors. Firms' shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions. An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout. This mechanism parsimoniously accounts for postwar comovement in investment, stock prices, leverage and payout, at both business cycle and medium term cycle frequencies. Ambiguity aversion permits a Markov-Switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.
    Keywords: Asset Pricing; Business cycle; DSGE; Markov-switching
    JEL: C32 E32 G12
    Date: 2017–04
  13. By: Katarzyna Growiec; Jakub Growiec; Bogumil Kaminski
    Abstract: Based on a novel computational multi-agent model, we identify the keymechanisms allowing the social network structure, summarized by four key socialcapital dimensions (network degree, centrality, bridging and bonding social capital), to affect individuals' social trust, willingness to cooperate, social utility and economicperformance. We then trace how the individual-level outcomes aggregate up to thesociety level. Model setup draws from socio-economic theory and empirical findings based on our novel survey dataset. Results include aggregate-level comparative staticsand individual-level correlations. We find, inter alia, that societies that either arebetter connected, exhibit a lower frequency of local cliques, or have a smaller share offamily-based cliques, record relatively better economic performance. As long as familyties are sufficiently valuable, there is a trade-off between aggregate social utility andeconomic performance, and small world networks are then socially optimal.
    Keywords: social network structure, social trust, willingness to cooperate, economicperformance, computational multi-agent model
    JEL: C63 D85 J31 L14 Z13
    Date: 2017–03
  14. By: Christopher J. Tyson (Queen Mary University of London)
    Abstract: The class of preferences over opportunity sets ("menus") rationalizable by underlying preferences over the alternatives is characterized for the general case in which the dataset is unrestricted. In particular, both the universal set of alternatives and the domain of menus over which preferences are asserted by the decision maker are arbitrary. The key "Cover Dominance" axiom states that any menu strictly preferred to a collection of menus must be strictly preferred to any menu covered by the collection. The method of characterization relies upon transitivity of menu preferences, but completeness can be relaxed.
    Keywords: General domains, Opportunity sets, Revealed preference, Transitivity
    JEL: D01 D11
    Date: 2017–04
  15. By: Tenani, Paulo Sérgio
    Abstract: The Mutual Fund Theorem is an elegant way of describing how investors with different attitudes towards risk should construct their portfolios. It is, however, often misinterpreted. This paper revisits the topic by defining the Risk Portfolio as a self-financed tactical overlay portfolio in which all the overweight and underweight positions cancel each other out. In this sense no net resources are ever allocated to the Risk Portfolio and all the investment is allocated to the Minimum Variance Portfolio. Under these circumstances the Mutual Fund Theorem implies that the ratio of Bonds to Stocks in the Total Portfolio would depend on investor´s risk aversion; as it is actually observed in practice. The paper also argues that the Asset Allocation puzzle, as traditionally stated in the literature, only arises because of a misconception about the “the facto” definition of the Risk Portfolio.
    Date: 2017–01–24
  16. By: TOMIURA Eiichi; ITO Banri; MUKUNOKI Hiroshi; WAKASUGI Ryuhei
    Abstract: This paper examines individual attitudes toward immigration and compares them with trade policy preferences based on a survey of over 10,000 respondents in Japan. People opposing both immigration and import liberalization are influenced by status-quo bias, while risk averters are more likely to be protectionists. Individuals with anti-immigrant sentiments tend to have pessimistic prospects of the national economy, dislike of changing of residential locations, or have no personal acquaintances with foreigners. These findings suggest that wide-ranging measures are required for expanding support for immigration. We also confirm the effects of such standard variables as education, occupation, unemployment, and gender.
    Date: 2017–03
  17. By: Dustmann, Christian (University College London); Fasani, Francesco (Queen Mary, University of London); Meng, Xin (Australian National University); Minale, Luigi (Universidad Carlos III de Madrid)
    Abstract: This paper analyses the relation between individual migrations and the risk attitudes of other household members when migration is a household decision. We develop a simple model that implies that which member migrates depends on the distribution of risk attitudes among all household members, and that the risk diversification gain to other household members may induce migrations that would not take place in an individual framework. Using unique data for China on risk attitudes of internal (rural-urban) migrants and the families left behind, we empirically test three key implications of the model: (i) that conditional on migration gains, less risk averse individuals are more likely to migrate; (ii) that within households, the least risk averse individual is more likely to emigrate; and (iii) that across households, the most risk averse households are more likely to send migrants as long as they have at least one family member with sufficiently low risk aversion. Our results not only provide evidence that migration decisions are taken on a household level but also that the distribution of risk attitudes within the household affects whether a migration takes place and who will emigrate.
    Keywords: risk aversion, internal migration, household decisions
    JEL: J61 R23 D81
    Date: 2017–03
  18. By: José Renato Haas Ornelas; Roberto Baltieri Mauad
    Abstract: This paper extends the empirical literature on Volatility Risk Premium (VRP) and future returns by analyzing the predictive ability of Commodities Currencies VRP and commodities VRP. The empirical evidence throughout this paper provides support for a positive relationship of Commodities Currencies VRP and future commodities returns, but only for the period after the 2008 Global Financial Crisis. This predictability survives to the inclusion of control variables like the Equity VRP and past currency returns. Furthermore, we find a negative relationship between Gold VRP and future commodities and currency returns. This result corroborates the view of Gold as a safe haven asset.
    Keywords: commodities predictability, volatility risk premium, safe haven
    Date: 2017–03
  19. By: Sylvain Chassang (Princeton University)
    Abstract: This paper develops a prior-free version of Markowitz (1952)’s efficient portfolio theory that allows the decision maker to express preferences over risk and reward, even though she is unable to express a prior over potentially non-stationary returns. The corresponding optimal allocation strategies are admissible, interior, and exhibit a form of momentum. Empirically, prior-free efficient allocation strategies successfully exploit time-varying risk premium present in historical returns.
    Keywords: prior-free portfolios, non-stationary returns, time-varying risk premium, fear-of-missing out, fear-of-loss, regret aversion, drawdown frontier
    JEL: G11
    Date: 2016–01
  20. By: Stephen Morris (Princeton University); Hyun Song Shin (Bank for International Settlements)
    Abstract: We explore a global game model of the impact of monetary policy shocks. Risk-neutral asset managers interact with risk-averse households in a market with a risky bond and a floating rate money market fund. Asset managers are averse to coming last in the ranking of short-term performance. This friction injects a coordination element in asset managers’ portfolio choice that leads to large jumps in risk premiums in response to small future anticipated changes in central bank policy rates. The size of the asset management sector is the key parameter determining the extent of market disruption to monetary policy shocks.
    Keywords: market liquidity, risk-taking channel, runs
    JEL: E43 E52 E58
    Date: 2015–12
  21. By: Giacomo Marangoni (FEEM, CMCC and Politecnico di Milano); Gauthier De Maere (FEEM); Valentina Bosetti (FEEM, CMCC and Bocconi University)
    Abstract: The availability of technology plays a major role in the feasibility and costs of climate policy. Nonetheless, technological change is highly uncertain and capital intensive, requiring risky efforts in research and development of clean energy technologies. In this paper, we introduce a two-track method that makes it possible to maintain the rich set of information produced by climate-economy models while introducing the dimension of uncertainty in innovation ef- forts, without succumbing to computation complexity. In particular, we solve the problem of an optimal R&D portfolio by employing Approximate Dynamic Programming, through multiple runs of an integrated assessment model (IAM) for the purpose of computing the value function, and expert elicitation data to quantify the relevant uncertainties. We exemplify the methodology with the problem of evaluating optimal near-term innovation investment portfolios in four key clean energy technologies (solar, biofuels, bioelectricity and personal electric vehicle batteries), taking into account the uncertainty surrounding the effectiveness of innovation to improve the performance of these technologies. We employ an IAM (WITCH) which has a fairly rich description of the energy technologies and experts’ beliefs on future costs for the above-mentioned technologies. Focusing on Europe and its short-term climate policy commitments, we find that batteries in personal transportation dominate the optimal public R&D portfolio. The resulting ranking across technologies is robust to changes in risk-aversion, R&D budget limitation and assump- tions on crowding out of other investments. These results suggest an important upscaling of R&D efforts compared to the recent past.
    Keywords: Energy, Innovation, Technological Change, Uncertainty, Climate Policy
    JEL: O30 O33 Q40 Q41 Q50 Q55
    Date: 2017–04
  22. By: Cabrales, Antonio; Espin, Antonio; Kujal, Praveen; Rassenti, Stephen
    Abstract: Recent experiments suggest that social behavior may be shaped by the time available for decision making. It is known that fast decision making relies more on intuition whereas slow decision making is affected by reflective processes. Little is known, however, about whether people correctly anticipate the effect of intuition vs. reflection on others' decision making. This is important in everyday situations where anticipating others' behavior is often essential. A good example of this is the extensively studied Trust Game where the trustor, by sending an amount of money to the trustee, runs the risk of being exploited by the trusteee's subsequent action. We use this game to study how trustors' choices are affected by whether trustees are externally forced to respond quickly or slowly. We also examine whether trustors' own tendency to stop and reflect on their intuitions (as measured by the Cognitive Reflection Test) moderates how they anticipate the effect of reflection on the behavior of trustees. We find that the least reflective trustors send less money when trustees are forced to respond "reflectively" rather than "intuitively" , but we also argue that this is a wrong choice. In general, no group, including the ones with the largest number of reflective individuals, is good at anticipating the (positive) effect of forced delay on others' trustworthiness.
    Keywords: beliefs; dual-process; intuition; reflection; Trust; trustworthiness
    Date: 2017–04
  23. By: Maaike Diepstraten; Carin van der Cruijsen
    Abstract: We analyse whether and how individual savings and current accounts holders respond to government interventions at banks. We are the first to employ a difference-in-difference analysis, distinguish between a nationalisation and a capital injection, and separate between the two banking products. We find that the aggregate switching behaviour of consumers at intervened banks is similar before and after the troubles and intervention. This holds for both type of interventions, both type of products, and for switching from and to the intervened bank. However, we show heterogeneity in consumer responses to government interventions, depending on the type of intervention and banking product. For example, compared to consumers who trust the government, consumers with no or little trust are more likely to switch away from a bank after a nationalisation, relative to customers of the control bank. This holds for switching with the savings and current account. This highlights that trust in the government is an important prerequisite for a successful nationalisation. Second, responses depend on consumers' level of risk aversion. Risk averse current account holders at a nationalised bank are more likely to switch away than customers of the control bank. This result indicates that interventions can make consumers more aware of the troubles the intervened bank faces, and result in an outflow of consumers if a large share is risk averse.
    Keywords: consumer bank switching; bail-outs; capital injection; nationalisation; trust in the government; risk aversion
    JEL: D14 G21 G28
    Date: 2017–03
  24. By: Dirk Bergemann (Yale University); Benjamin Brooks (University of Chicago); Stephen Morris (Princeton University)
    Abstract: A single unit of a good is to be sold by auction to one of two buyers. The good has either a high value or a low value, with known prior probabilities. The designer of the auction knows the prior over values but is uncertain about the correct model of the buyers' beliefs. The designer evaluates a given auction design by the lowest expected revenue that would be generated across all models of buyers' information that are consistent with the common prior and across all Bayesian equilibria. An optimal auction for such a seller is constructed, as is a worst-case model of buyers' information. The theory generates upper bounds on the seller's optimal payoff for general many-player and common-value models.
    Keywords: Optimal auctions, common values, information structure, mo del uncertainty, ambiguity aversion, robustness, Bayes correlated equilibrium, revenue maximization, revenue equivalence, information rent
    JEL: C72 D44 D82 D83
    Date: 2016–12
  25. By: Hao Chen; Hua Liao; Bao-Jun Tang; Yi-Ming Wei (Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology)
    Abstract: The impacts of OPEC's political risk on the fluctuations of international crude oil prices have caused widespread concern and analyzing the impacts is of great significance to the investment decisions and risk aversion strategies in the crude oil markets. Therefore, using the International Country Risk Guide (ICRG) index as a proxy for the countries' political risk situation, we empirically investigate the impacts of OPEC's political risk on the Brent crude oil prices, based on several Structural Vector Autoregression (SVAR) models. The main empirical results indicate that: (1) The political risk of OPEC countries does have a significant and positive influence on Brent crude oil prices in the sample period from January 1998 to September 2014, and the most significant positive influences appear in about one and a half year and last about a year. (2) The OPEC's integrated political risk contribute to 17.58% of the oil price fluctuations in the sample period, which is only lesser than that of the oil demand shocks (34.64%). (3) Compared with the political risk of OPEC countries in North Africa and South America, the political risk of OPEC countries in Middle East contribute most to the oil price fluctuations. (4) Among the eight components of the political risk in OPEC, the internal conflicts contribute most to the oil price fluctuations in the sample period.
    Keywords: OPEC; Political risk; Oil price; SVAR
    JEL: Q54 Q40
    Date: 2016–10–01

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