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on Utility Models and Prospect Theory |
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Issue of 2017‒06‒04
nine papers chosen by |
| By: | Masanari Asano; Irina Basieva; Andrei Khrennikov; Masanori Ohya; Yoshiharu Tanaka |
| Abstract: | In this paper, we introduce a new model of selection behavior under risk that describes an essential cognitive process for comparing values of objects and making a selection decision. This model is constructed by the quantum-like approach that employs the state representation specific to quantum theory, which has the mathematical framework beyond the classical probability theory. We show that our quantum approach can clearly explain the famous examples of anomalies for the expected utility theory, the Ellsberg paradox, the Machina paradox and the disparity between WTA and WTP. Further, we point out that our model mathematically specifies the characteristics of the probability weighting function and the value function, which are basic concepts in the prospect theory. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1705.08536&r=upt |
| By: | Oliver de Groot (University of St Andrews); Alexander W. Richter (Federal Reserve Bank of Dallas); Nathaniel A. Throckmorton (College of William & Mary) |
| Abstract: | Basu and Bundick (2017) show a second moment intertemporal preference shock creates meaningful declines in output in a sticky price model with Epstein and Zin (1991) preferences. The result, however, rests on the way they model the shock. If a preference shock is included in Epstein-Zin preferences, the distributional weights on current and future utility must sum to 1, otherwise it creates an asymptote in the response to the shock with unit intertemporal elasticity of substitution. When we change the preferences so the weights sum to 1, the asymptote disappears as well as their main results—uncertainty shocks generate small increases in output and comovement with consumption and investment that is at odds with the data. We examine three changes to the model—recalibration, a risk-premium shock, and a disaster risk-type shock—to try and restore their results, but in all three cases the model is unable to match VAR evidence. |
| Keywords: | Stochastic Volatility, Epstein-Zin Preferences, Uncertainty, Economic Activity |
| JEL: | D81 E32 |
| Date: | 2017–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1703&r=upt |
| By: | Thai Ha-Huy (EPEE, University of Evry-val-d’Essonne); Cuong Le Van (IPAG Business School, Paris School of Economics, CNRS, TIMAS); Frank Page (Indiana University); Myrna Wooders (Vanderbilt University) |
| Abstract: | We consider an exchange economy with a finite number of assets and a finite number of agents. The utility functions of the agents are concave, strictly increasing and their suprema equal infity. We use weak no-arbitrage prices a la Dana and Le Van [5]. Our main result is: an equilibrium exists if, and only if, their exists a weak no-arbitrage price common to all the agents. |
| Keywords: | asset market equilibrium, individually rational attainable allocations, individually rational utility set, no-arbitrage prices, weak noarbitrage prices, no-arbitrage condition |
| JEL: | C62 D50 D81 D84 G1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eve:wpaper:17-06&r=upt |
| By: | Curtis, John |
| Abstract: | This paper examines anglers' preferences for active stock management of pike populations within designated wild brown trout fisheries in Ireland. While the policy of pike control has a long history, it is not without controversy and conflict. As the objective of pike control is the protection of trout stocks, a superficial view might be that trout anglers favour and pike anglers oppose such management intervention. Pike and trout anglers do not have homogeneous preferences; in fact, a substantial minority of pike anglers also fish for trout and vice versa. The current paper is the first to examine Irish pike and trout anglers' preferences over fishery attributes, including pike stock control methods. Preference data was elicited by means of choice experiments for pike and trout anglers and a latent class site choice model is used to estimate anglers' utility functions. Not surprisingly model results show that pike anglers do not support pike stock control and almost universally would choose fishing sites where there are no pike stock controls, all else equal. We find that the majority of trout anglers, 61%, are negatively disposed towards pike stock control, and all else equal, are more likely to choose fishing sites where pike stocks are not actively managed. A substantial minority of trout anglers (i.e. 39%) could be considered advocates of pike control, with about one-third of these being more extreme in their preferences, with site choice probabilities of such anglers being largely determined by the pike control management option. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp563&r=upt |
| By: | Cantillo, Miguel |
| Abstract: | This paper develops an equilibrium asset pricing framework that allows for investor aggregation, and assumes a log-normally distributed aggregate endowment growth. This framework allows me to derive the equilibrium risk free rate, the expected market return, and expected returns for individual securities. To test how reasonable the results are, I use data of several developed economies from Campbell (2003, 2017) to find a median value of relative risk aversion of 1.57, and a time preference rate of 4.58%. The framework allows me to estimate a version of the CAPM and a multi-period pricing model. |
| Keywords: | Asset Pricing, General Equilibrium, CAPM, Equity Premium Puzzle |
| JEL: | D53 E21 G12 G13 G32 |
| Date: | 2017–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79357&r=upt |
| By: | Roberto Marfè; Julien Penasse |
| Abstract: | While time-varying disasters can explain many characteristics of financial markets, their quantitative assessment is still missing. We propose a latent variable approach to estimate the time-varying probability of a macroeconomic disaster, using a dataset of 42 countries over more than 100 years. We find that disaster risk is volatile and persistent, strongly correlates with the dividend yield, and forecasts stock returns. A state-of-the-art model calibrated with our disaster risk estimates generates a large and volatile equity premium and a low risk free rate under standard assumptions. This evidence supports the idea that investors' fear of disasters drives equity premium dynamics. |
| Keywords: | rare disasters, equity premium, return predictability, state-space model |
| JEL: | E44 G12 G17 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:463&r=upt |
| By: | Nelson, Katherine M.; Schlüter, Achim; Vance, Colin |
| Abstract: | This study examines the effect of participants' distributional preferences on donations of money and time using a field experiment with marine resource users in Indonesia. Individuals participate in a real effort task to earn money and are faced with a donation decision under different treatments - monetary donation, time donation, monetary match, and time match. In the distributional preferences elicitation we classify individuals' preferences as benevolent, egalitarian, own-money-maximizing, and spiteful. We find that the different distributional preference types are a significant indicator of participants' donation behavior. The people showing spiteful preferences and those that focus only on maximizing their own payoff are less likely to donate any amount compared to those that make egalitarian choices. Furthermore, we find strong evidence that individuals that choose payoff structures characterized as "benevolent" donate a significantly higher amount compared to the egalitarian types. We analyze the results econometrically in two-stages to better understand the determining factors for whether an individual donates and those factors that determine how much one donates. Practical implications involve the segmentation of the target audience, not by the type of charity but by the mechanism which motivates their donation behavior. |
| Keywords: | distributional preferences,donations,field experiment |
| JEL: | Q22 Z1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:690&r=upt |
| By: | Nihad Aliyev (Finance Discipline Group, UTS Business School, University of Technology Sydney); Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology Sydney) |
| Abstract: | This paper investigates the impact of informational ambiguity and attitude to it on security prices. Attention is focused on equilibria in which a market maker has an ambiguity in his probability assessment. We show that the equilibrium ambiguous bid-ask spread can be decomposed into the probabilistic spread and an “ambiguity premium/discount” component characterizing the ambiguity aversion/seeking of the market maker. In particular, for a sufficiently ambiguity averse market maker, the bid-ask spread widens with the informational ambiguity of the market maker, which provides an explanation to drying liquidity and price inefficiency during financial turmoils. An extension to different trade sizes shows that informed traders are more likely to trade large orders when there is a major ambiguous shock to the economy. |
| Keywords: | market microstructure; informational ambiguity; Choquet expectation; generalized Bayesian updating; non-additive probability |
| JEL: | G14 D81 D82 |
| Date: | 2017–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:383&r=upt |
| By: | Mariola Sasinowska (University of Warsaw, Warsaw) |
| Abstract: | Research background: The article is primarily based on the research in the field of welfare economics, utility theory, social capital and econometrics. In the paper are discussed articles such authors as Bjornskov, Easterlin, Ravallion and Uslaner. Purpose of the article: The purpose is to explore the generalized social trust and subjective welfare of Poles and to their relationship. According to the author’s knowledge, such extensive research like this for Poland has not been yet conducted. Methodology of the article: Data sample used in the research comes from the project "Wycena, Aspekty Sprawiedliwosci i Preferencje Wzgledem Odnawialnych Zrodel Energii i ich lokalizacji w Polsce i w Niemczech" which was carried out with the support of the National Science Center. Econometric model was prepared based on the least squares method and the ordered probit model. Findings & Value Added: The main outcome of this paper is confirmed importance of the relationship between social trust and the subjective welfare of Poles. Furthermore, it has been proven that both social trust and subjective wealth can be linked both to income and non-income related factors such as inequality and education. |
| Keywords: | welfare economy; subjective economic welfare; social trust; ordered probit model |
| JEL: | D1 D6 I3 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:pes:wpaper:2017:no107&r=upt |