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on Utility Models and Prospect Theory |
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Issue of 2017‒09‒24
ten papers chosen by |
| By: | Gerhardt, Holger; Schildberg-Hörisch, Hannah; Willrodt, Jana |
| Abstract: | A core prediction of recent “dual-self” models is that risk attitudes depend on self-control. While these models have received a lot of attention, empirical evidence regarding their predictions is lacking. We derive hypotheses from three prominent models for choices between risky monetary payoffs under regular and reduced self-control. We test the hypotheses in a lab experiment, using a well-established ego depletion task to reduce self-control, and measuring risk attitudes via finely graduated choice lists. Manipulation checks document the effectiveness of the depletion task. We find no systematic evidence in favor of the theoretical predictions. In particular, depletion does not increase risk aversion. |
| Keywords: | Risk attitudes, Self-control, Ego depletion, Dual-self models, Experiment |
| JEL: | C91 D03 D81 |
| Date: | 2017–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81490&r=upt |
| By: | Nikolaus Hautsch; Stefan Voigt |
| Abstract: | We theoretically and empirically study large-scale portfolio allocation problems when transaction costs are taken into account in the optimization problem. We show that transaction costs act on the one hand as a turnover penalization and on the other hand as a regularization, which shrinks the covariance matrix. As an empirical framework, we propose a flexible econometric setting for portfolio optimization under transaction costs, which incorporates parameter uncertainty and combines predictive distributions of individual models using optimal prediction pooling. We consider predictive distributions resulting from high-frequency based covariance matrix estimates, daily stochastic volatility factor models and regularized rolling window covariance estimates, among others. Using data capturing several hundred Nasdaq stocks over more than 10 years, we illustrate that transaction cost regularization (even to small extent) is crucial in order to produce allocations with positive Sharpe ratios. We moreover show that performance differences between individual models decline when transaction costs are considered. Nevertheless, it turns out that adaptive mixtures based on high-frequency and low-frequency information yield the highest performance. Portfolio bootstrap reveals that naive 1/N-allocations and global minimum variance allocations (with and without short sales constraints) are significantly outperformed in terms of Sharpe ratios and utility gains. |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1709.06296&r=upt |
| By: | Jürgen Eichberger (Alfred Weber Institut, Universität Heidelberg.); Simon Grant (Research School of Economics, Australian National University.); David Kelsey (Department of Economics, University of Exeter) |
| Abstract: | We propose a solution concept for a class of extensive form games with ambiguity. Speci?cally we consider multi-stage games. Players have CEU preferences. The associated ambiguous beliefs are revised by Generalized Bayesian Updating. We assume individuals take account of possible changes in their preferences by using consistent planning. We show that if there is ambiguity in the centipede game it is possible to sustain ?cooperation? for many periods as part of a consistent-planning equilibrium under ambiguity. In a non-cooperative bargaining game we show that ambiguity may be a cause of delay in bargaining. |
| Keywords: | optimism, neo-additive capacity, dynamic consistency, consistent planning, centipede game, multi-stage game. |
| JEL: | D81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1705&r=upt |
| By: | Loukas Balafoutas (University of Innsbruck); Brent J. Davis (University of Innsbruck); Matthias Sutter (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Tournament incentives prevail in labor markets, in particular with respect to promotions. Yet, it is often unclear to competitors how many winners there will be or how many applicants compete in the tournament. While it is hard to measure how this uncertainty affects work performance and willingness to compete in the field, it can be studied in a controlled lab experiment. We present a novel experiment where subjects can compete against each other, but where the number of winners is either uncertain (i.e., unknown numbers of winners, but known probabilities) or ambiguous (unknown probabilities for different numbers of winners). We compare these two conditions with a control treatment with a known number of winners. We find that ambiguity induces a significant increase in performance of men, while we observe no change for women. Both men and women increase their willingness to enter competition with uncertainty and ambiguity, but men react slightly more than women. Overall, both effects contribute to men winning the tournament significantly more often than women under uncertainty and ambiguity. Hence, previous experiments on gender differences in competition may have measured a lower bound of differences between men and women. |
| Keywords: | gender, competition, uncertainty, ambiguity, experiment |
| JEL: | C91 D03 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2017_18&r=upt |
| By: | Pauline Morault (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille) |
| Abstract: | In many societies, marriage is a decision taken at the familial level. Arranged marriages are documented from Renaissance Europe to contemporary rural Kenya, and are still prevalent in many parts of the developing world. However, this family dimension has essentially been neglected by the existing matching literature on marriages. The objective of this paper is to introduce family considerations into the assignment game. We explore how shifting decision-making to the family level affects matching on the marriage market. We introduce a new concept of familial stability and find that it is weaker than individual stability. The introduction of families into the marriage market generates coordination problems, so the central result of the transferable utility framework no longer holds: a matching can be family-stable even if it does not maximize the sum of total marital surpluses. Interestingly, even when the stable matching is efficient, family decision-making drastically modifies how the surplus is shared-out. These results may have fundamental implications for pre-marital investments. We find that stable matchings depend on the type of family partitioning. Notably, when each family contains one son and one daughter, familial and individual stability are equivalent. |
| Keywords: | marriage, family, matching, transferable utility |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1724&r=upt |
| By: | Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud |
| Abstract: | A common assumption in the optimal taxation literature is that the social planner maximizes a welfarist social welfare function with weights decreasing with income. However, high transfer withdrawal rates in many countries imply very low weights for the working poor in practice. We reconcile this puzzle by generalizing the optimal taxation framework by Saez (2002) to allow for alternatives to welfarism. We calculate weights of a social planner's function as implied by the German tax and transfer system based on the concepts of welfarism, minimum absolute and relative sacrifice, as well as subjective justness. For the latter we use a novel question from the German Socio-Economic Panel. We find that the minimum absolute sacrifice principle is in line with social weights that decline with net income. Absolute subjective justness is roughly in line with decreasing social weights, which is reflected by preferences of men, West Germans, and supporters of the grand coalition parties. |
| Keywords: | Justness,Optimal Taxation,Income Redistribution,Equal Sacrifice,Inequality,Subjective Preferences |
| JEL: | D63 D60 H21 H23 I38 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201726&r=upt |
| By: | Ngo van Long (McGill University); Vincent Martinet (INRA Economie Publique) |
| Abstract: | We propose a new criterion reflecting both the concern for rights and the concern for welfare in the evaluation of economic development paths. The concern for rights is captured by a pre-ordering over combinations of thresholds corresponding to floors or ceilings on various quantitative indicators. The resulting constraints on actions and on levels of state variables are interpreted as minimal rights to be guaranteed to all generations, for intergenerational equity purposes. The level of these rights are endogenously chosen, accounting for the « cost in terms of welfare'' of granting them. Such a criterion could embody the idea of sustainable development. We provide an axiomatization of such a criterion and characterize the tension between rights and welfare in a general economic framework. We apply the criterion to the standard Dasgupta-Heal-Solow model of resource extraction and capital accumulation. We show that if the weight given to rights in the criterion is sufficiently high, the optimal solution is on the threshold possibility frontier. The development path is then « driven'' by the rights. In particular, if a minimal consumption is considered as a right, constant consumption can be optimal even with a positive utility discount rate. In this case, the shadow value of the right plays an important role in the determination of the rate of discount to be applied to social investment projects. |
| Keywords: | Rights, welfare, intergenerational equity, sustainability, |
| JEL: | D63 H43 Q01 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2017.18&r=upt |
| By: | Benjamin Hébert; Michael Woodford |
| Abstract: | We propose a new principle for measuring the cost of information structures in rational inattention problems, based on the cost of generating the information used to make a decision through a dynamic evidence accumulation process. We introduce a continuous-time model of sequential information sampling, and show that, in a broad class of cases, the choice frequencies resulting from optimal information accumulation are the same as those implied by a static rational inattention problem with a particular static information-cost function. Among the static cost functions that can be justified in this way is the mutual information cost function proposed by Sims (2010), but we show that other cost functions can be micro-founded in this way as well. In particular, we introduce a class of “neighborhood-based” cost functions, which make it more costly to undertake experiments that can produce different results in similar states, and show that the predictions of this alternative rational inattention theory better conform with evidence from perceptual discrimination experiments. |
| JEL: | D83 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23787&r=upt |
| By: | Sarkisian, Roberto |
| Abstract: | This paper studies incentives provision when agents are characterized either by homo moralis preferences (Alger and Weibull, 2013, 2016), i.e. their utility is represented by a convex combination of selfish preferences and Kantian morality, or by altruism. In a moral hazard in teams setting with two agents whose efforts affect output stochastically, I demonstrate that the power of extrinsic incentives decreases with the degrees of morality and altruism displayed by the agents, thus leading to increased profits for the principal. I also show that a team of moral agents will only be preferred if the production technology exhibits decreasing returns to efforts, the probability of a high realization of output conditional on both agents exerting effort is suficiently high and either the outside option for the agents is zero or the degree of morality is suficiently low. |
| Keywords: | Moral hazard in teams; optimal contracts; homo moralis preferences;altruism |
| JEL: | D03 D82 D86 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31966&r=upt |
| By: | João V. Ferreira (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Nicolas Gravel (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille) |
| Abstract: | We propose a framework for the analysis of choice behavior when the later explicitly depends upon time. We relate this framework to the traditional setting from which time is absent. We illustrate the usefulness of the introduction of time by proposing three possible models of choice behavior in such a framework: (i) changing preferences, (ii) preference formation by trial and error, and (iii) choice with endogenous status-quo bias. We provide a full characterization of each of these three choice models by means of revealed preference-like axioms that could not be formulated in a timeless setting. |
| Keywords: | choice behavior, time, revealed preferences, changing preferences, learning by trial-and-error, inertia bias |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1729&r=upt |