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on Utility Models and Prospect Theory |
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Issue of 2017‒07‒09
sixteen papers chosen by |
| By: | Larry G. Epstein (Boston University); Yoram Halevy (University of British Columbia) |
| Abstract: | Many decisions are made in environments where outcomes are determined by the realization of multiple random events. A decision maker may be uncertain how these events are related. We identify and experimentally substantiate behavior that intuitively reflects a lack of confidence in their joint distribution. Our findings suggest a dimension of ambiguity which is different from that in the classical distinction between risk and "Knightian uncertainty." |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2017-006&r=upt |
| By: | Ying Hu; Gechun Liang; Shanjian Tang |
| Abstract: | Using the elements from the theory of quadratic backward stochastic differential equations with unbounded terminal data, we solve an exponential utility maximization problem with unbounded random endowments under portfolio constraints. Our results thus generalize the previous results of Hu et al. (2005) [Ann. Appl. Probab., 15, 1691--1712] from bounded to unbounded case. As an application, we study utility indifference valuation of financial derivatives with unbounded payoffs, obtaining a new convex dual representation of the prices and their asymptotics for the risk aversion parameter. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1707.00199&r=upt |
| By: | Luo, Yulei; Nie, Jun; Young, Eric |
| Abstract: | This paper develops a tractable continuous-time recursive utility (RU) version of the Huggett (1993) model to explore how the preference for robustness (RB) interacts with intertemporal substitution and risk aversion and then affects the interest rate, the dynamics of consumption and income, and the welfare costs of model uncertainty in general equilibrium. We show that RB reduces the equilibrium interest rate and the relative volatility of consumption growth to income growth when the income process is stationary, but our benchmark model cannot match the observed relative volatility. An extension to an RU-RB model with a risky asset is successful at matching this ratio. The model implies that the welfare costs of uncertainty are very large. |
| Keywords: | Robustness, Precautionary Savings, the Permanent Income Hypothesis, Low Interest Rates, Consumption and Income Inequality, General Equilibrium |
| JEL: | E2 E21 |
| Date: | 2017–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80046&r=upt |
| By: | Biørn, Erik (Dept. of Economics, University of Oslo) |
| Abstract: | How are substitution in the spatial and in the temporal sense connected? Can estimates based on data with spatial variation be transmitted into values appropriate for exploring temporal variation, and vice versa? This paper, building on, inter alia, Frisch (1959), attempts to give some clarifications and provides elements of a synthesis. The income elasticity of the marginal utility of income, whose inverse is often called the ‘Frisch parameter’, and its multi-period counterpart, the wealth elasticity of the marginal utility of wealth, are key concepts. Three cases with additive preferences are discussed, and in that context the role of the (generalized) ‘Frisch parameter’ as an overall measure of substitution across commodities and over time is reconsidered. |
| Keywords: | Frisch elasticity; Frisch demand; Intertemporal substitution; Additive preferences; Marginal utility of Income; Marginal utility of wealth |
| JEL: | D11 D12 D91 |
| Date: | 2017–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2017_004&r=upt |
| By: | Weidner, Frank (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:187&r=upt |
| By: | Luo, Yulei; Nie, Jun; Wang, Gaowang; Young, Eric |
| Abstract: | We use a recursive utility version of a basic Huggett (1993) model to study the cross-sectional dispersion of consumption and wealth (relative to income). The basic model implies too little dispersion compared to the data, whereas a one-parameter extension to include rational inattention (limited information processing) delivers a better fit to both facts in general equilibrium. In particular, intertemporal substitution plays an important role in determining the two key dispersion moments via affecting the degree of optimal attention in equilibrium. Alternative models that rely on habit formation, incomplete information about current income, or borrowing constraints are not consistent with the facts we document. |
| Keywords: | Rational Inattention; General Equilibrium; Consumption and Wealth Volatility |
| JEL: | E2 E21 |
| Date: | 2017–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80045&r=upt |
| By: | Trockel, Walter (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:197&r=upt |
| By: | Gottinger, Hans Werner (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:25&r=upt |
| By: | Daniel Bartl; Samuel Drapeau; Ludovic Tangpi |
| Abstract: | Accounting for model uncertainty in risk management leads to infinite dimensional optimization problems which are both analytically and numerically untractable. In this article we study when this fact can be overcome for the so-called optimized certainty equivalent risk measure (OCE) - including the average value-at-risk as a special case. First we focus on the case where the set of possible distributions of a financial loss is given by the neighborhood of a given baseline distribution in the Wasserstein distance, or more generally, an optimal-transport distance. Here it turns out that the computation of the robust OCE reduces to a finite dimensional problem, which in some cases can even be solved explicitly. Further, we derive convex dual representations of the robust OCE for measurable claims without any assumptions on the set of distributions and finally give conditions on the latter set under which the robust average value-at-risk is a tail risk measure. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1706.10186&r=upt |
| By: | David Puelz; P. Richard Hahn; Carlos Carvalho |
| Abstract: | This paper considers portfolio construction in a dynamic setting. We specify a loss function comprised of utility and complexity components with an unknown tradeoff parameter. We develop a novel regret-based criterion for selecting the tradeoff parameter to construct optimal sparse portfolios over time. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1706.10180&r=upt |
| By: | Yang, Bill Huajian |
| Abstract: | Common ordinal models, including the ordered logit model and the continuation ratio model, are structured by a common score (i.e., a linear combination of a list of given explanatory variables) plus rank specific intercepts. Sensitivity with respect to the common score is generally not differentiated between rank outcomes. In this paper, we propose an ordinal model based on forward ordinal probabilities for rank outcomes. The forward ordinal probabilities are structured by, in addition to the common score and intercepts, the rank and rating (for a risk-rated portfolio) specific sensitivity. This rank specific sensitivity allows a risk rating to respond to its migrations to default, downgrade, stay, and upgrade accordingly. An approach for parameter estimation is proposed based on maximum likelihood for observing rank outcome frequencies. Applications of the proposed model include modeling rating migration probability for point-in-time probability of default term structure for IFRS9 expected credit loss estimation and CCAR stress testing. Unlike the rating transition model based on Merton model, which allows only one sensitivity parameter for all rank outcomes for a rating, and uses only systematic risk drivers, the proposed forward ordinal model allows sensitivity to be differentiated between outcomes and include entity specific risk drivers (e.g., downgrade history or credit quality changes for an entity in last two quarters can be included). No estimation of the asset correlation is required. As an example, the proposed model, benchmarked with the rating transition model based on Merton model, is used to estimate the rating migration probability and probability of default term structure for a commercial portfolio, where for each rating the sensitivity is differentiated between migrations to default, downgrade, stay, and upgrade. Results show that the proposed model is more robust. |
| Keywords: | PD term structure, forward ordinal probability, common score, rank specific sensitivity, rating migration probability |
| JEL: | C0 C01 C02 C13 C18 C4 C5 C51 C52 C53 C54 C58 C61 C63 E61 G3 G31 G32 G38 O3 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79934&r=upt |
| By: | van Hoorn, Andre |
| Abstract: | Economists are increasingly using primes that make group identity salient to overcome the inferential limitations of behavioral quasi-experiments involving pre-existing groups (e.g., males vs. females). However, while priming group identity provides powerful means for identifying a causal effect of group membership on individuals’ preferences, so far, there has been little methodological reflection on the use of identity primes to identify the causes of group differences in preferences. This note’s main contribution is to offer a framework for thinking systematically about the treatment effects of priming individuals’ group identity and the identification of specific group traits explaining differences in preferences or behavior between pre-existing groups. The framework sets a high bar for studying the causes of group differences in preferences using identity primes but we clarify its usefulness using concrete examples. |
| Keywords: | Experimentation; random assignment; salience; quasi-experiment; group membership; culture |
| JEL: | C36 C90 Z10 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80011&r=upt |
| By: | Rosa Ferrer Zarzuela; Helena Perrone |
| Abstract: | Using an ideal setting from a major food safety crisis, we estimate a full demand model for the unsafe product and its substitutes and recover consumers' preference parameters. Counterfactual exercises quantify the relevance of di erent mechanisms -changes in safety perceptions, idiosyncratic tastes, nutritional characteristics, and prices-driving consumers' response. We find that consumers' reaction is limited by their taste for the product and its nutritional characteristics. Due to the costs associated with switching away from the a ected product, the decline in demand following a product-harm crisis tends to understate the true weight of such events in consumers' utility. Indeed, we nd that a large fraction of consumers are unresponsive to the crisis even when they significantly downgrade their product safety perception. For an accurate assessment of the crisis, managerial strategies should therefore account for how di erent demand drivers bind consumers' substitution patterns. |
| Keywords: | Food safety, demand estimation, scanner data, idiosyncratic utility parameters, nutritional preferences |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1571&r=upt |
| By: | Bondareva, Olga (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:183&r=upt |
| By: | Michele Capriati (Università degli Studi di Bari Aldo Moro); Marialuisa Divella (Università degli Studi di Bari Aldo Moro) |
| Abstract: | This paper analyses the way in which innovation and absorptive capacity affect the productivity of Italian provinces. It builds on the Neo-Schumpeterian literature which investigates how technology gaps explain development disparities between countries and regions. The study is carried out at the provincial level, which allows a more fine-tuned analysis of the resource endowment linked to knowledge generation and economic performance. Moreover, it distinguishes between two very different types of innovation: those directly dependent on R&D and new knowledge generation which are generally measured by the number of patents; and those relying on the adaptation of processes, products and materials and thus mostly based on the exploitation of already existing knowledge, which are here measured by a new index based on registered utility models and industrial designs. Main results indicate a case of divergence in productivity levels instead of one of catching up among the Italian provinces; moreover, they suggest that the main effort to get productivity gains in this country has been carried out through a reduction of employment and of its related costs instead of via increasing R&D and human capital. |
| Keywords: | innovation, patents, utility models, industrial designs, provinces, proximity |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:cme:wpaper:1702&r=upt |
| By: | Nicolas Vallois (Université Picardie Jules Verne; CRIISEA); Dorian Jullien (Université Côte d'Azur; GREDEG CNRS) |
| Abstract: | Experimental economists increasingly apply econometric techniques to interpret their data, as suggested the emergence of "experimetrics" in the 2000's (Camerer, 2003; Houser, 2008; Moffatt, 2015). Yet statistics remains a minor topic in experimental economics' (EE) methodology. This article aims to study the historical roots of this present paradox. To do so, we analyze the use of statistical tools in EE from early economics experiments of the 1940's-1950's to the present days. Our narrative is based on qualitative analysis of published papers for the earliest periods and on bibliometric and quantitative approaches for the more recent time period. Our results reveal a significant change in EE' statistical methods, from purely descriptive methods to more sophisticated and standardized techniques. Statistics now plays a decisive role in the way EE estimates rationality, particularly in structural modeling approaches, but it is still considered as a non-methodological, because purely technical, matter. Our historical analysis shows that this technical conception was the result of a long-run evolution of research tactics in EE, that notably allowed experimental economists to escape from psychologist's more re exive culture toward statistics. |
| Keywords: | Experimental Economics, Statistics, Econometrics, History of Economic Thought, Methodology |
| JEL: | B20 C83 A14 C90 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2017-20&r=upt |