
on Utility Models and Prospect Theory 
By:  Brissimis, Sophocles N.; Bechlioulis, Alexandros P. 
Abstract:  The assumption of multiplicative nonseparable (CobbDouglas) consumer preferences is a key assumption for analyzing the interdependence of consumption and leisure choices. In this paper we solve the consumer utility maximization problem under these preferences and derive a simultaneous system of two equations corresponding to a static and an intertemporal equation of consumption and leisure choice. The system is estimated with GMM to obtain consistent estimates of the consumer's preference parameters, of which the relative weight of consumption in the utility function is found to be much higher than that commonly assumed in DSGE model calibration exercises. 
Keywords:  CobbDouglas consumer preferences; consumption and leisure choices; GMM estimation; weight of consumption in utility 
JEL:  C36 C61 D12 E44 
Date:  2017–07–27 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:80877&r=upt 
By:  Gollier, Christian 
Abstract:  Suppose that the decisionmaker is uncertain about the variance of the payoff of a gamble, and that this uncertainty comes from not knowing the number of zeromean i.i.d. risks attached to the gamble. In this context, we show that any nth degree increase in this variance risk reduces expected utility if and only if the sign of the 2nth derivative of the utility function u is (1)n+1. Moreover, increasing the statistical concordance between the mean payoff of the gamble and the nth degree riskiness of its variance reduces expected utility if and only if the sign of the 2n + 1 derivative of u is (1)n+1. These results generalize the theory of risk apportionment developed by Eeckhoudt and Schlesinger (2006), and is useful to better understand the impact of stochastic volatility on welfare and asset prices. 
Keywords:  Longrun risk; stochastic dominance; prudence; temperance; stochastic volatility; risk apportionment. 
JEL:  D81 
Date:  2017–07 
URL:  http://d.repec.org/n?u=RePEc:tse:wpaper:31818&r=upt 
By:  Garth Heutel 
Abstract:  Investments in energy efficiency entail uncertainty, and when faced with uncertainty consumers have been shown to behave according to prospect theory: preferences are referencedependent and exhibit loss aversion, and probabilities are subjectively weighted. Using data from a choice experiment eliciting prospect theory parameters, I provide evidence that lossaverse people are less likely to invest in energy efficiency. Then, I consider policy design under prospect theory when there are also externalities from energy use. A higher degree of loss aversion implies a higher subsidy to energy efficiency. Numerical simulations suggest that the impact of prospect theory on policy may be substantial. 
JEL:  D81 H23 Q41 Q58 
Date:  2017–08 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:23692&r=upt 
By:  Alexander MeyerGohde; 
Abstract:  I entertain a generalization of the standard BolzmannGibbsShannon measure of entropy in multiplier preferences of model uncertainty. Using this measure, I derive a generalized exponential certainty equivalent, which nests the exponential certainty equivalent of the standard HansenSargent model uncertainty formulation and the power certainty equivalent of the popular EpsteinZinWeil recursive preferences as special cases. Besides providing a model uncertainty rationale to these risksensitive preferences, the generalized exponential equivalent provides additional flexibility in modeling uncertainty through its introduction of pessimism into agents, causing them to overweight events made more likely in the worst case model when forming expectations. In a standard neoclassical growth model, I close the gap to the HansenJagannathan bounds with plausible detection error probabilities using the generalized exponential equivalent and show that HansenSargent and EpsteinZinWeil preferences yield comparable market prices of risk for given detection error probabilities. 
Keywords:  model uncertainty; robust control; recursive preferences; equity premium puzzle; Tsallis entropy 
JEL:  C61 C63 E17 
Date:  2017–08 
URL:  http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2017017&r=upt 
By:  Phoebe Koundouri; Nikitas Pittis (University of Piraeus, Greece); Panagiotis Samartzis; Nikolaos Englezos; Andreas Papandreou 
Abstract:  The concept of ambiguity with respect to decision making about climate change has recently attracted a lot of research interest. The standard approach for introducing ambiguity into this framework is to assume that the decision maker (DM) exhibits ambiguity aversion, with the latter being represented by axioms on DMs preferences different than SavageÃƒÂ¢ïÂ¿Â½ïÂ¿Â½s (surething principle). As a result, DM is deprived of the property of probabilistic sophistication, since she is faced with either multiple prior probability functions, or a single but incoherent one (capacity). This paper approaches the issue of ambiguity with respect to climate change from a different perspective. In particular, we assume that ambiguity does exists but it does not affect the formation of DMs prior probability function. Instead, it aÃƒï¿½ÂÂ¤ects the formation of her posterior probability function. Specifically, we assume that there are n experts, who supply DM with probabilistic input. Hence, although DM has a well defined prior (formed before any expert information on objective probabilities has arrived), she cannot decide which piece of information should conditionalize upon (defer to). We refer to this type of ambiguity as "deferential ambiguity" and show that it affects both DM and the experts. We also introduce a second type of ambiguity, which is solely born by the experts. This type of ambiguity stems from the experts potential inability to discern DMs preferences. This ambiguity is referred to as "preferential ambiguity" in the paper. The main objective of the paper is to analyze the possible interactions between the two types of ambiguity mentioned above and to assess their impact on the probabilistic properties (in particular, tail risks) of environmentalpolicy variables. 
Keywords:  decision making on climate change, ambiguity, deep uncertainty, Savageâï¿½ï¿½s surething principle, deferential ambiguity, preferential ambiguity, tail risks of environmentalpolicy variables. 
JEL:  D8 D80 D81 D83 D 
Date:  2017–08 
URL:  http://d.repec.org/n?u=RePEc:aue:wpaper:1703&r=upt 
By:  Leonidas S. Rompolis (Athens University of Economics and Business) 
Abstract:  This paper examines the impact of unconventional monetary policy of ECB measured by its balance sheet expansion on euro area equity market uncertainty and investors risk aversion within a structural VAR framework. An expansionary balance sheet shock decreases both risk aversion and uncertainty at least in the mediumrun. A negative shock on policy rates has also a negative impact on risk aversion and uncertainty. These results are generally robust to different specifications of the VAR model, estimation procedures and identification schemes. Conversely, periods of high uncertainty are followed by a looser conventional monetary policy. The effect of uncertainty on ECB’s total assets and of risk aversion on conventional or unconventional monetary policy is not always statistically significant. 
Keywords:  Unconventional monetary policy; euro area; risk aversion; uncertainty 
JEL:  C32 E44 E52 G12 
Date:  2017–07 
URL:  http://d.repec.org/n?u=RePEc:bog:wpaper:231&r=upt 
By:  James Costain (Banco de España) 
Abstract:  This paper models a nearrational agent who chooses from a set of feasible alternatives, subject to a cost function for precise decisionmaking. Unlike previous papers in the «control costs» tradition, here the cost of decisions is explicitly interpreted in terms of time. That is, by choosing more slowly, the decisionmaker can achieve greater accuracy. Moreover, the timing of the choice is itself also treated as a costly decision. A trade off between the precision and the speed of choice becomes especially interesting in a strategic situation, where each decision maker must react to the choices of others. Here, the model of costly choice is applied to a sequential bargaining game. The game closely resembles that of Perry and Reny (1993), in which making an offer, or reacting to an offer, requires a positive amount of time. But whereas Perry and Reny treat the decision time as an exogenous fixed cost, here we allow the decisionmaker to vary precision by choosing more or less quickly, thus endogenizing the order and timing of offers and responses in the game. Numerical simulations of bargaining equilibria closely resemble those of the Binmore, Rubinstein, and Wolinsky (1983) framework, except that the time to reach agreement is nonzero and offers are sometimes rejected. In contrast to the model of Perry and Reny, our numerical results indicate that equilibrium is unique when the space of possible offers is sufficiently finely spaced. 
Keywords:  C72, C78, D81 
Date:  2017–08 
URL:  http://d.repec.org/n?u=RePEc:bde:wpaper:1729&r=upt 
By:  George M. Constantinides; Michal Czerwonko; Stylianos Perrakis 
Abstract:  The optimal portfolio of a utilitymaximizing investor trading in the S&P 500 index and cash, subject to proportional transaction costs, becomes stochastically dominated when overlaid with a zeronetcost portfolio of S&P 500 options bought at their ask and written at their bid price in most months over 19902013. Dominance is prevalent when the ATMIV is high, right skew is low, and option maturity is short. The portfolios include mostly calls and positions are overwhelmingly short. Similar results obtain with options on the CAC and DAX indices. The results are explained neither by priced factors nor a nonmonotonic stochastic discount factor. 
JEL:  G10 G11 G13 G23 
Date:  2017–08 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:23708&r=upt 
By:  Phoebe Koundouri; Nikitas Pittis (University of Piraeus, Greece); Panagiotis Samartzis; Nikolaos Englezos; Andreas Papandreou 
Date:  2017–07 
URL:  http://d.repec.org/n?u=RePEc:aue:wpaper:1702&r=upt 
By:  Robert A. Becker (Indiana University); Juan Pablo RincónZapatero (Univesidad Carlos III de Madrid) 
Abstract:  We reconsider the theory of Thompson aggregators proposed by Marinacci and Montrucchio. First, we prove a variant of their Recovery Theorem estabilishing the existence of extremal solutions to the Koopmans equation. Our approach applies the constructive TarskiKantorovich Fixed Point Theorem rather than the nonconstructive Tarski Theorem employed in their paper. We verify the Koopmans operator has the order continuity property that underlies invoking TarskiKantorovich. Then, under more restrictive conditions, we demonstrate there is a unique solution to the Koopmans equation. Our proof is based on $u_{0}$ concave operator techniques as first developed by Kransosels'kii. This differs from Marinacci and Montrucchio's proof as well as proofs given by MartinsdaRocha and Vailakis. 
Keywords:  Recursive Utility, Thompson Aggregators, Koopmans Equation, Extremal Solutions, Concave Operator Theory 
Date:  2017–07 
URL:  http://d.repec.org/n?u=RePEc:inu:caeprp:2017007&r=upt 