nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2018‒03‒05
27 papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Varieties of risk elicitation By Friedman, Daniel; Habib, Sameh; James, Duncan; Crockett, Sean
  2. Cheap talk by multiple speakers in the presence of network externalities By Chung, Jeahan; Kim, Jeong-Yoo
  3. Strategy-proof multi-object allocation: Ex-post revenue maximization with no wastage By Tomoya Kazumura; Debasis Mishra; Shigehiro Serizawa
  4. Smoothed GMM for quantile models By Luciano de Castro; Antonio F. Galvao; David M. Kaplan; Xin Liu
  5. DeMo by NaMo (Demonetization by Narendra Modi): Money burning in India By Gupta, N.
  6. Ancient Origins of the Global Variation in Economic Preferences By Anke Becker; Benjamin Enke; Armin Falk
  7. Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk By Krueger, Dirk; Ludwig, Alexander
  8. Rationality and Asset Prices under Belief Heterogeneity By Daniele Giachini
  9. About the Looking Forward Approach in Cooperative Differential Games with Transferable Utility By Ovanes Petrosian
  10. Unrestricted Domain Extensions of Dominant Strategy Implementable Allocation Functions By Paul H. Edelman; John A Weymark
  11. Characterizing NTU-Bankruptcy Rules using Bargaining Axioms By Dietzenbacher, Bas; Peters, Hans
  12. The Effect of Inequality Aversion on a Climate Coalition Formation: Theory and Experimental Evidence By Lin, Yu-Hsuan
  13. Optimal Monetary Policy Under Bounded Rationality By Benchimol, Jonathan; Bounader, Lachen
  14. Optimality of the Friedman rule under ambiguity By Eisei Ohtaki
  15. Investment Decisions with Two-Factor Uncertainty By Compernolle, T.; Huisman, Kuno; Kort, Peter; Lavrutich, Maria; Nunes, Claudia; Thijssen, J.J.J.
  16. What Aspects of Formality Do Workers Value? Evidence from a Choice Experiment in Bangladesh By Minhaj Mahmud; Italo A. Gutierrez; Krishna B. Kumar; Shanthi Nataraj
  17. Confidence and Career Choices: An Experiment By Barron, Kai; Gravert, Christina
  18. Cognition, optimism and the formation of age-dependent survival beliefs By Grevenbrock, Nils; Groneck, Max; Ludwig, Alexander; Zimper, Alexander
  19. Does Entrepreneurial Logic Impact Funding Evaluation of Startups? By Jain, Rajesh; Mendonca, Valerie; Vohra, Neharika; Sharma, Supriya
  20. The Stable Roommates problem with short lists By Agnes Cseh; Robert W. Irving; David F. Manlove
  21. Other-regarding Preferences and Social Norms in the Intergenerational Transfer of Renewable Resources when Agent has Present-Biased Preferences By Persichina, Marco
  22. The Lost Capital Asset Pricing Model By Andrei, Daniel; Cujean, Julien; Wilson, Mungo
  23. Presidential Cycles and Time-Varying Bond-Stock Correlations: Evidence from More than Two Centuries of Data By Riza Demirer; Rangan Gupta
  24. New Results on Betting Strategies, Market Selection, and the Role of Luck By Giulio Bottazzi; Daniele Giachini
  25. Essays in banking and household finance By Diepstraten, Maaike
  26. Stock Market Returns and Consumption By Di Maggio, Marco; Kermani, Amir; Majlesi, Kaveh
  27. Stock Market Returns and Consumption By Di Maggio, Marco; Kermani, Amir; Majlesi, Kaveh

  1. By: Friedman, Daniel; Habib, Sameh; James, Duncan; Crockett, Sean
    Abstract: We explore a variety of risk preference elicitation procedures that involve direct choice from a set of lotteries, including budget lines (BL) and binary choice lists (HL). We find statistically significant violations of the expected utility hypothesis (EUH) consistent with disappointment aversion, and also find violations of first order stochastic dominance, but both sorts of violations are mostly small and only slightly impair the predictive power of a parametric implementation of EUH. The estimated coefficient of relative risk aversion, gamma, varies widely across individual subjects (consistent with EUH) and also across elicitation tasks (inconsistent with direct implementation of EUH). An alternative nonparametric measure of risk preferences displays similar patterns. The two risk preference measures are highly correlated with each other for each elicitation task. Each separate measure varies widely across individual subjects and across elicitation tasks, with low to nil correlation between BL tasks and HL tasks. Some of the variation across tasks can be explained by attributes such as graphical vs text representation that have no role in decision theory.
    Keywords: risk aversion,experiment,elicitation,multiple price list
    JEL: C91 D81 D89
    Date: 2018
  2. By: Chung, Jeahan; Kim, Jeong-Yoo
    Abstract: The authors develop a model of cheap talk with multiple speakers in the presence of network externalities so that their utility functions are increasing in the network size. They first show that if there is no noise in private information that each sender receives, the full information is revealed by the harshest cross-checking strategies, that is, strategies to punish the senders unless their messages exactly coincide. Then, the authors show that with even a small noise cross-checking strategies cannot induce full revelation if utility functions of senders are linear in the network size, while full revelation is possible if utility functions are strictly concave. They find a sufficient condition for the existence of a fully revealing equilibrium which is supported by the cross-checking strategy with a positive confidence interval independent of each sender's private information.
    Keywords: cheap talk,cross-checking strategy,fully revealing equilibrium,network externality,word-of-mouth communication
    JEL: C7 D8
    Date: 2018
  3. By: Tomoya Kazumura; Debasis Mishra; Shigehiro Serizawa
    Abstract: A seller is selling multiple objects to a set of agents. Each agent can buy at most one object and his utility over consumption bundles (i.e., (object,transfer) pairs) need not be quasilinear. The seller considers the following desiderata for her (allocation) rule, which she terms desirable: (1) strategy-proofness, (2) ex-post individual rationality, (3) equal treatment of equals, (4) no wastage (every object is allocated to some agent). The minimum Walrasian equilibrium price (MWEP) rule is desirable. We show that at each preference profile, the MWEP rule generates more revenue for the seller than any desirable rule satisfying no subsidy. Our result works for quasilinear domain, where the MWEP rule is the VCG rule, and for various non-quasilinear domains, some of which incorporate positive income effect of agents. We can relax no subsidy to no bankruptcy in our result for certain domains with positive income effect.
    Date: 2017–10
  4. By: Luciano de Castro (University of Iowa); Antonio F. Galvao (University of Arizona); David M. Kaplan (University of Missouri); Xin Liu
    Abstract: This paper develops theory for feasible estimation and testing of finite-dimensional parameters identified by general conditional quantile restrictions, under much weaker assumptions than previously seen in the literature. This includes instrumental variables nonlinear quantile regression as a special case. More specifically, we consider a set of unconditional moments implied by the conditional quantile restrictions, providing conditions for local identification. Since estimators based on the sample moments are generally impossible to compute numerically in practice, we study feasible estimators based on smoothed sample moments. We propose a method of moments estimator for exactly identified models, as well as a generalized method of moments estimator for over-identified models. We establish consistency and asymptotic normality of both estimators under general conditions that allow for weakly dependent data and nonlinear structural models. Simulations with iid and dependent data illustrate the finite-sample properties. Our in-depth empirical application concerns the consumption Euler equation derived from quantile utility maximization. Advantages of the quantile Euler equation include robustness to fat tails, decoupling of risk attitude from the elasticity of intertemporal substitution, and log-linearization without any approximation error. For the four countries we examine, the quantile estimates of discount factor and elasticity of intertemporal substitution are economically reasonable for a range of quantiles above the median, even when two-stage least squares estimates are not reasonable.
    Keywords: instrumental variables, nonlinear quantile regression, quantile utility maximization
    JEL: C31 C32 C36
    Date: 2017–07–10
  5. By: Gupta, N.
    Abstract: Despite the well-documented hardship caused by demonetization policy implemented on 8th November 2016 in India, the large scale public support and acceptance of it was puzzling. Was this acceptance a silent protest to punish those with ill-gotten wealth and an aversion towards the growing inequality in the country? Motivated by this ambiguity, this thesis attempts to understand the demonetization acceptance as being in line with the research in experimental economics and experimental psychology that argues that notions such as inequity aversion and fairness drives human behaviour into taking decisions which are not economically rational. More specifically, the study will examine the role of social preferences and fairness in an economic agents’ behaviour. The research paper designs a “money-burning” experiment in a field setting in India and attempts to mimic the acquisition of money through unfair means (black money) and thereafter offers participants a chance to punish each other (reduce each other’s money at a cost to themselves). The study finds a balanced support for both, self-interest behaviour and fairness preference. Empirically, the study did not find any link between the burning behaviour and demonetization acceptance.
    Keywords: social preferences, money burning, fairness, procedural fairness, experimental economics, demonetization, India
    Date: 2018–02–20
  6. By: Anke Becker; Benjamin Enke; Armin Falk
    Abstract: Variation in economic preferences is systematically related to both individual and aggregate economic outcomes, yet little is known about the origins of the worldwide preference variation. This paper uses globally representative data on risk aversion, time preference, altruism, positive reciprocity, negative reciprocity, and trust to uncover that contemporary preference heterogeneity has its roots in the structure of the temporally distant migration patterns of our very early ancestors: In dyadic regressions, differences in preferences between populations are significantly increasing in the length of time elapsed since the ancestors of the respective groups broke apart from each other. To document this pattern, we link genetic and linguistic distance measures to population-level preference differences (i) in a wide range of cross-country regressions, (ii) in within-country analyses across groups of migrants, and (iii) in analyses that leverage variation across linguistic groups. While temporal distance drives differences in all preferences, the patterns are strongest for risk aversion and prosocial traits.
    JEL: D03
    Date: 2018–02
  7. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
    Keywords: Idiosyncratic Risk,Taxation of Capital,Overlapping Generations,Precautionary Saving,Pecuniary Externality
    JEL: H21 H31 E21
    Date: 2018
  8. By: Daniele Giachini
    Abstract: In this paper I study the relationship between rationality and asset prices when agents have heterogeneous and incorrect beliefs about future events. Using the fully rational pricing as a benchmark, I show that when agents behave according to the Subjective Generalized Kelly rule (Bottazzi et al., 2017), which is not optimal under agents' beliefs, the long-run pricing performance is at least as good as the one emerging from an economy where agents maximize their preferences under rational price expectations. Indeed, there exist generic cases in which expected long-run prices of the Subjective Generalized Kelly economy approximate better the rational pricing than those attained by the utility maximizers economy. Moreover in the limit of agents having a discount factor equal to one the prices of the Subjective Generalized Kelly economy converge to those of the fully rational economy. Hence the fact that agents use non-optimal (heuristic) decision rules may correct for biases in beliefs and, as a consequence, improve the pricing performance of the economy.
    Keywords: Belief Heterogeneity, Rationality, Investment Rules, Heuristics, Financial Markets, Asset Pricing
    Date: 2018–02–22
  9. By: Ovanes Petrosian (National Research University Higher School of Economics)
    Abstract: This paper presents a complete description and the results of the Looking Forward Approach for cooperative differential games with transferable utility. The approach is used for constructing game theoretical models and defining solutions for conflict-controlled processes where information about the process updates dynamically or for differential games with dynamic updating. It is supposed that players lack certain information about the dynamical system and payoff function over the whole time interval on which the game is played. At each instant, information about the game structure updates, players receive new updated information about the dynamical system and payoff functions. A resource extraction game serves as an illustration in order to compare a cooperative trajectory, imputations, and the imputation distribution procedure in a game with the Looking Forward Approach and in the original game with a prescribed duration.
    Keywords: Differential Games, Cooperative Differential Games, Looking Forward Approach, Time Consistency, Strong Time Consistency.
    JEL: C71 C73
    Date: 2018
  10. By: Paul H. Edelman (Vanderbilt University); John A Weymark (Vanderbilt University)
    Abstract: It is shown that any one-person dominant strategy implementable allocation function on a restricted domain of types can be extended to the unrestricted domain in such a way that dominant strategy implementability is preserved when utility is quasilinear. A sufficient condition is identified for which this extension is essentially unique.
    Keywords: dominant strategy incentive compatible, implementation theory, mechanism design
    JEL: D7 D8
    Date: 2018–02–27
  11. By: Dietzenbacher, Bas (Tilburg University, Center For Economic Research); Peters, Hans
    Abstract: This paper takes an axiomatic bargaining approach to bankruptcy problems with nontransferable utility by characterizing bankruptcy rules in terms of properties from bargaining theory. In particular, we derive new axiomatic characterizations of the proportional rule, the truncated proportional rule, and the constrained relative equal awards rule using properties which concern changes in the estate or the claims.
    Keywords: NTU-bankruptcy problem; axiomatic analysis; bargaining theory
    JEL: C78 D74
    Date: 2018
  12. By: Lin, Yu-Hsuan
    Abstract: This chapter examines the impact of inequality-averse attitudes on the individual incentives of participating in international environmental agreements by a laboratory experiment. The experimental result shows that the inequality-averse attitudes have significantly positive impact on the incentives of participation. Particularly, when they are non-critical players, egalitarians are likely to give up the free riding benefit by joining a coalition. It helps us to understand the coalition formation in the international conventions.
    Keywords: Social preference, experimental design, international environmental agreement, inequality aversion, heterogeneous countries
    JEL: C91 D71 Q01 Q54 Q58
    Date: 2017–01
  13. By: Benchimol, Jonathan (Bank of Israel); Bounader, Lachen (Mohammed V University)
    Abstract: Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. Stabilizing properties and bounded rationality-independence generally affect the regime's optimality. The policymaker's knowledge of an agent's myopia is decisive, whereas bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can be welfare increasing.
    JEL: C53 D01 D11 E37 E52
    Date: 2018–01–01
  14. By: Eisei Ohtaki
    Abstract: This article reexamines optimality of the Friedman rule in an economy, wherein (i) spatial separation and limited communication create a transactions role for money (ii) banks arise to provide liquidity, and (iii) agents are nonsmooth ambiguity aversion. It is shown that the structure of the set of “second-best” monetary policies crucially depends on the relation between the set of beliefs and the marginal productivity of capital. Especially, in order for the Friedman rule to be suboptimal, it is necessary for the maximum of subjective probabilities of realizing liquidity events to be sufficiently small.
  15. By: Compernolle, T.; Huisman, Kuno (Tilburg University, Center For Economic Research); Kort, Peter (Tilburg University, Center For Economic Research); Lavrutich, Maria (Tilburg University, Center For Economic Research); Nunes, Claudia; Thijssen, J.J.J. (Tilburg University, Center For Economic Research)
    Abstract: This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. It shows that, despite claims made in the literature, the method used to derive an analytical solution in one dimensional problems cannot be straightforwardly extended to problems with two stochastic processes. To illustrate, we analyze an investment problem with two stochastic revenue streams and a constant sunk cost. We show that a semi-analytical approach leads to a sub-optimal investment policy. The main message of our paper is that non-homogeneous investment problems can only be solved numerically
    Keywords: investment analysis; optimal stopping time problem; two-factor uncertainty
    JEL: C65 D81 L12
    Date: 2018
  16. By: Minhaj Mahmud; Italo A. Gutierrez; Krishna B. Kumar; Shanthi Nataraj
    Abstract: In this study, we use a choice experiment to elicit workers' willingness to pay (WTP) for specific job benefits typically associated with formal employment (contracts, termination notice, paid leave, preferred working hours, and access to a retirement account). We find that workers most value job stability: the average worker would be willing to give up 19 percent of monthly income for a 6-month contract, 27 percent for a 1-year contract and 44 percent for a permanent contract (relative to no contract). Thirty days' of termination notice would also be valued at about 12 percent of monthly income. Using a latent class model, we explore preference heterogeneity and find that government workers are more likely to place a higher value on long-term contracts than private sector employees, while casual workers are more likely to have a particularly strong preference for higher salary, and a relatively low WTP for various benefits. This heterogeneity may be driven by sorting or loss aversion. Our work also lends support to the use of choice experiments to overcome the challenges associated with estimating WTP for specific job benefits from hedonic wage regressions or from observed job durations.
    Date: 2017–07
  17. By: Barron, Kai (University College London and WZB Berlin); Gravert, Christina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Confidence is often seen as the key to success. Empirical evidence about whether such beliefs causally map into actions is, however, sparse. In this paper, we experimentally investigate the causal effect of an increase in confidence about one’s own ability on two central choices made by workers in the labor market: choosing between jobs with different incentive schemes, and the subsequent choice of how much effort to exert within the job. Using a hard-easy task manipulation to shift beliefs, we find that beliefs can be shifted, which in turn shifts decisions. In our setting, the beliefs of low ability individuals are more malleable than those of high ability individuals. Therefore, the treatment induces an increase in confidence and detrimental decision making by low ability workers but does not affect the outcomes of high ability workers. Men and women react similarly to the treatment. However, men hold higher baseline beliefs, implying that women make better incentive choice decisions. Policy implications regarding pre-labor market confidence development by means of feedback and grade inflation are discussed.
    Keywords: Overconfidence; experiment; beliefs; real-effort; grade inflation
    JEL: C91 D03 J24 M50
    Date: 2018–01
  18. By: Grevenbrock, Nils; Groneck, Max; Ludwig, Alexander; Zimper, Alexander
    Abstract: This paper investigates the roles psychological biases play in empirically estimated deviations between subjective survival beliefs (SSBs) and objective survival probabilities (OSPs). We model deviations between SSBs and OSPs through age-dependent inverse S-shaped probability weighting functions (PWFs), as documented in experimental prospect theory. Our estimates suggest that the implied measures for cognitive weakness, likelihood insensitivity, and those for motivational biases, relative pessimism, increase with age. We document that direct measures of cognitive weakness and motivational attitudes share these trends. Our regression analyses confirm that these factors play strong quantitative roles in the formation of subjective survival beliefs. In particular, cognitive weakness is an increasingly important contributor to the overestimation of survival chances in old age.
    Keywords: Subjective Survival Beliefs,Probability Weighting Function,Confirmatory Bias,Cognition,Optimism
    JEL: D12 D83 I10
    Date: 2018
  19. By: Jain, Rajesh; Mendonca, Valerie; Vohra, Neharika; Sharma, Supriya
    Abstract: From a neoclassical economics perspective, entrepreneurship involves rational decision-making and entrepreneurs engage in rational, goal-driven behavior. However, such a view is put to test in current, dynamic business environments characterized by high level of uncertainty. Expert entrepreneurs adopt a nimble, iterative and effectual approach to be able to navigate such dynamic environments. While there is growing confidence about the desirable outcomes of an effectual logic, there is limited evidence based understanding of how such a logic is perceived by stakeholders in the entrepreneurial ecosystem. For instance, how do investors assess causal vs. effectual logics of entrepreneurs? This study attempts to pursue this question. We use data from a national level entrepreneurship competition held in India in 2015 to understand the influence of entrepreneurs’ logics on their funding outcomes. We find that the logics of the selected and not selected entries are significantly distinct. Furthermore, results from a binary logistic regression reveal an inclination of investors towards causal logic. Adoption of causal logic increases a startup’s chances of funding by about 50%. Findings are discussed in reference to implications for the current entrepreneurship ecosystem.
    Date: 2018–02–21
  20. By: Agnes Cseh (Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences, and Corvinus University of Budapest); Robert W. Irving (School of Computing Science, University of Glasgow); David F. Manlove (School of Computing Science, Sir Alwyn Williams Building, University of Glasgow)
    Abstract: We consider two variants of the classical Stable Roommates problem with Incomplete (but strictly ordered) preference lists (sri) that are degree constrained, i.e., preference lists are of bounded length. The first variant, egal d-sri, involves finding an egalitarian stable matching in solvable instances of sri with preference lists of length at most d. We show that this problem is NP-hard even if d = 3. On the positive side we give a 2d+3 7 -approximation algorithm for d 2 {3, 4, 5} which improves on the known bound of 2 for the unbounded preference list case. In the second variant of sri, called d-srti, preference lists can include ties and are of length at most d. We show that the problem of deciding whether an instance of d-srti admits a stable matching is NP-complete even if d = 3. We also consider the “most stable” version of this problem and prove a strong inapproximability bound for the d = 3 case. However for d = 2 we show that the latter problem can be solved in polynomial time.
    Keywords: stable matching, bounded length preference lists, complexity, approximation algorithm
    JEL: C63 C78
    Date: 2017–09
  21. By: Persichina, Marco
    Abstract: The paper analyses the effects of the present-bias in terms of reduction of the welfare of future generations in the framework of renewable resources harvesting. In particular, this study queries the behavioral traits that emerge when the agent is present-biased and also in presence of other-regarding preferences toward future generations, which are expressed through the adherence to genuine other-regarding preferences or social norms. This investigation demonstrates that the strategic short-sightedness imposed by the “dictatorship of the present” causes a reduction in the well-being of future generations, despite the existence of strong social preferences. Faced with this problem, this study argues that if the social preferences of the individuals are not left only and exclusively to their own spontaneous behavior, and if these social preferences are also expressed through social norms that prescribe to not reevaluate the harvesting decisions, a mitigation of the effect of present bias on the intergenerational equity can occur.
    Keywords: Present bias, naive agent, intergenerational resource management, renewable resources, other-regarding preferences, social norms
    JEL: D01 D03 D90 D91 Q20 Q50
    Date: 2016–07–20
  22. By: Andrei, Daniel; Cujean, Julien; Wilson, Mungo
    Abstract: A flat Securities Market Line is not evidence against the CAPM. Under the Roll (1977) critique, the CAPM is a "lost city of Atlantis," empirically invisible. In a noisy rational-expectations economy, there exists an information gap between the average investor who holds the market and the empiricist who does not observe the market portfolio. The CAPM holds for the investor, but appears flat to the empiricist. This distortion is empirically substantial and explains, for instance, why "Betting Against Beta" works; BAB really bets on true beta. Macroeconomic announcements reduce the distortion---for a fleeting moment the empiricist catches a glimpse of the CAPM.
    Date: 2018–01
  23. By: Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper examines the effect of presidential cycles on financial market correlations using monthly data for the U.S. stock and government bond returns over the historical period of 1791:09-2017:12. Utilizing a dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) model to capture the time-varying correlations, we show that Democratic administrations are generally associated with lower degree of co-movement between the stock and government bond returns. The observed negative presidential cycle effect is robust over various sub-samples identified by structural break tests. The findings are in line with the documented presidential cycle effect on stock market returns and corroborate recent evidence that, when risk aversion is high, agents tend to elect the Democratic Party.
    Keywords: Conditional correlation, GARCH, Bond and Stock Returns Comovement, US Presidential Cycles
    JEL: C22 C32 D72 G10 G12
    Date: 2018–02
  24. By: Giulio Bottazzi; Daniele Giachini
    Abstract: We consider a repeated betting market populated by two agents who wage on a binary event according to generic betting strategies. We derive new simple criteria to establish the relative wealth of the two agents in the long run, only based on the odds they believe fair and how much they would bet when the odds are equal to the ones the other agent believes fair. Using our criteria, we show that for a large class of betting strategies it is generically possible that the ultimate winner is only decided by luck. As an example, we apply our conditions to the case of CRRA betting.
    Keywords: Bounded Rationality, Betting Strategies, Market Selection, Recurrent Processes, Luck
    Date: 2018–02–25
  25. By: Diepstraten, Maaike (Tilburg University, School of Economics and Management)
    Abstract: The thesis consists of four chapters in banking and household finance. The first chapter examines the joint impact of bank size and scope on banks’ exposure to systemic risk. It shows that the dark side of diversification dominates for small banks, whereas the bright side effects of diversification and innovation dominate for medium and large banks. The second chapter provides insight in consumer bank switching behaviour. It outlines the most important factors in explaining variation in switching propensities for switching with the main savings account, current account and mortgage loan. Besides, it documents barriers that withhold people from switching and sheds light on (hypothetical) policy initiatives to facilitate switching. The third chapter studies bank switching behaviour after government interventions. Although aggregate switching behaviour did not change after the troubles and bail-outs, there is heterogeneity in customer responses. Customers with low levels of trust in the government are more likely to switch away after a nationalisation. Moreover, risk-averse current account holders are more likely to leave the nationalised bank. The last chapter is on savings behaviour. It shows that the socio-economic dimension, parental teaching, household administration skills, personality factors and the social circle are all related to savings. The socio-economic dimension and the social circle are most important in explaining variation in savings behaviour, irrespective of how savings behaviour is measured.
    Date: 2018
  26. By: Di Maggio, Marco (Harvard Business School and NBER); Kermani, Amir (UC Berkeley and NBER); Majlesi, Kaveh (Lund University)
    Abstract: This paper employs Swedish data containing security level information on households' stock holdings to investigate how consumption responds to changes in stock market returns. We exploit households’ portfolio weights in previous years as an instrument for actual capital gains and dividends payments. We find that unrealized capital gains lead to a marginal propensity to consume (MPC) of 13 percent for the bottom 50% of the wealth distribution but a flat 5 percent for the rest of the distribution. We also find that households’ consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are broadly consistent with near-rational behavior in which households optimize their consumption with respect to capital gains and dividends income as if they were separate sources of income.
    Keywords: Capital gain; Dividend income; Consumption; Near-rational behavior
    JEL: D14 E21 G12
    Date: 2018–02–02
  27. By: Di Maggio, Marco (Harvard Business School); Kermani, Amir (UC Berkeley); Majlesi, Kaveh (Department of Economics, Lund University)
    Abstract: This paper employs Swedish data on households' stock holdings to investigate how consumption responds to changes in stock market returns. We instrument the actual capital gains and dividend payments with past portfolio weights. Unrealized capital gains lead to a marginal propensity to consume (MPC) of 13 percent for the bottom 50% of the wealth distribution, but a flat 5 percent for the rest of the distribution. Households' consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are consistent with households treating capital gains and dividends as separate sources of income.
    Keywords: Capital gain; Dividend income; Consumption; Near-rational behavior
    JEL: E21 G12
    Date: 2018–02–15

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