nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2018‒03‒26
twenty-six papers chosen by

  1. Optimal contract for a fund manager, with capital injections and endogenous trading constraints By Sergey Nadtochiy; Thaleia Zariphopoulou
  2. The Axiomatic Foundation of Logit By Breitmoser, Yves
  3. Probabilizing the consumer: Georgescu-Roegen, Marschak and Quandt on the Modeling of the Consumer in the 1950s By Jean-Sébastien Lenfant
  4. A Factor Pricing Model under Ambiguity By Katsutoshi Wakai
  5. How Conscious Are You of Others? Further Evidence on Relative Income and Happiness By Sun Youn Lee; Fumio Ohtake
  6. Global Evidence on Economic Preferences By Becker, Anke; Dohmen, Thomas; Enke, Benjamin; Falk, Armin; Huffman, David; Sunde, Uwe
  7. Belief updating: Does the 'good-news, bad-news' asymmetry extend to purely financial domains? By Barron, Kai
  8. Do Preferences and Biases Predict Life Outcomes? Evidence from Education and Labor Market Entry Decisions By Uschi Backes-Gellner; Holger Herz; Michael Kosfeld; Yvonne Oswald
  9. Smoothed GMM for quantile models By Luciano de Castro; Antonio F. Galvao; David M. Kaplan; Xin Liu
  10. Expectation-driven asset price fluctuations under the spirit of capitalism hypothesis: The role of heterogeneity By Lise Clain-Chamosset-Yvrard
  11. Risk, Time Pressure, and Selection Effects By Kocher, Martin; Schindler, David; Trautmann, Stefan; Xu, Yilong
  12. Ellsberg’s Decision Rules and Keynes’s Long-Term Expectations By Marcello Basili; Carlo Zappia
  13. Risk and Refugee Migration By Geraldine Bocquého; Marc Deschamps; Jenny Helstroffer; Julien Jacob; Majlinda Joxhe
  14. Subjective Probability Does Not Exist By Asad Zaman
  15. The probability to reach an agreement as a foundation for axiomatic bargaining By Lorenzo Bastianello; Marco LiCalzi
  16. Catastrophic risk : Social influences on insurance decisions By Krawczyk, Michal; Trautmann, Stefan; van de Kuilen, Gijs
  17. Whom to Educate? Financial Fraud and Investor Awareness By Zhengqing Gui; Yangguang Huang; Xiaojian Zhao
  18. Estimating the Value of Life and Injury for Pedestrians Using a Stated Preference Framework By Glenn P. Jenkins; Naghmeh Niroomand
  19. On the solution of the variational optimisation in the rational inattention framework By Nigar Hashimzade
  20. The Effect of Anchoring on Dishonest Behavior By Hiromasa Takahashi; Junyi Shen
  21. Controlling Human Utilization of Failure-Prone Systems via Taxes By Ashish R. Hota; Shreyas Sundaram
  22. RACORN-K: Risk-Aversion Pattern Matching-based Portfolio Selection By Yang Wang; Dong Wang; Yaodong Wang; You Zhang
  23. Causes of Vacancies in the Housing Market - A Literature Review By Carolin Fritzsche; Lars Vandrei
  24. Measuring Labor Market Segmentation from Incomplete Data By Noe Wiener
  25. Time preference and savoring – how to exploit the Loewenstein contradiction By Mann, Konstantin A.
  26. How Much Happiness can we find in the fear Index? By David Yechiam Aharon; Mahmoud Qadan

  1. By: Sergey Nadtochiy; Thaleia Zariphopoulou
    Abstract: In this paper, we construct a solution to the optimal contract problem for delegated portfolio management of the fist-best (risk-sharing) type. The novelty of our result is (i) in the robustness of the optimal contract with respect to perturbations of the wealth process (interpreted as capital injections), and (ii) in the more general form of principals objective function, which is allowed to depend directly on the agents strategy, as opposed to being a function of the generated wealth only. In particular, the latter feature allows us to incorporate endogenous trading constraints in the contract. We reduce the optimal contract problem to the following inverse problem: for a given portfolio (defined in a feedback form, as a random field), construct a stochastic utility whose optimal portfolio coincides with the given one. We characterize the solution to this problem through a Stochastic Partial Differential Equation (SPDE), prove its well-posedness, and compute the solution explicitly in the Black-Scholes model.
    Date: 2018–02
  2. By: Breitmoser, Yves (HU Berlin)
    Abstract: Multinomial logit is the canonical model of discrete choice but widely criticized for requiring functional form assumptions as foundation. The present paper shows that logit is behaviorally founded without such assumptions. Logit\'s functional form obtains if relative choice probabilities are independent of irrelevant alternatives and invariant to utility translation, to relabeling options (presentation independence), and to changing utilities of third options (context independence). Reviewing behavioral evidence, presentation and context independence seem to be violated in typical experiments, though not IIA and translation invariance. Relaxing context independence yields contextual logit (Wilcox, 2011), relaxing presentation independence allows to capture \"focality\" of options.
    Keywords: stochastic choice, logit, axiomatic foundation; behavioral evidence; utility estimation;
    JEL: D03 C13
    Date: 2018–03–07
  3. By: Jean-Sébastien Lenfant (CLERSE - Centre Lillois d’Études et de Recherches Sociologiques et Économiques - UMR 8019 - Université de Lille, Sciences et Technologies - ULCO - Université du Littoral Côte d'Opale - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Probabilistic models of choice (between sure prospects) have become a standard modeling practice since the 1980s, notably through the widespread use of the Logit Multinomial Model pioneered by McFadden (1974). However, the idea to model consumer’s behavior as a probabilistic behavior, hence accounting for some kind of behavioral instability in the pure theory of rational choice, dates back to the 1930s and led to significant investigations in the 1950s. It is the purpose of this article to confront three attempts by economists at developing models of individual choice that go beyond standard ordinalist utility theory through introducing principles of probabilistic behavior. We discuss first Georgescu-Roegen’s neglected contributions to this subject, though he pioneered the definition of probabilistic preference in 1936 and came back on the subject intensively in the 1950s. We then present Marschak’s (and his co-authors) attempts at axiomatizing a probabilistic model of choice in the same period. The third contribution studied is that of Quandt, who provides a more operational style of modeling. This set of contributions is discussed against a general background of transformations of the theory of rational behavior and of the methods proper to it.
    Keywords: consumer theory, indifference. , threshold in choice, intransitivity,probabilistic choice theory, Georgescu-Roegen, Marschak, Quandt, measurement of utility, experimental psychology
    Date: 2018
  4. By: Katsutoshi Wakai
    Abstract: We derive a factor pricing model under the economy where the representative agents preferences follow the smooth model of decision making under ambiguity as proposed by Klibano¤, Marinacci, and Mukerji (2005). A newly derived factor is called an ambiguity factor that captures a component of returns generated by ambigu- ity aversion.
    Keywords: Ambiguity aversion, asset pricing, factor pricing
    JEL: D81 G11 G12
  5. By: Sun Youn Lee; Fumio Ohtake
    Abstract: Extant research has found that an individual’s happiness is relative with respect to income, suggesting that it rises with own income and falls as the income of a reference group increases. Some recent studies emphasize that the effect of relative income is mediated by the extent to which people compare themselves with others (hereinafter, “relative consciousness”). Using the survey data of representative sample of Japan and the U.S., this paper extends the existing literature by providing a statistical evidence that underlines the importance of the intensity of relative consciousness in association with the perception of reference-group income in determining an individual’s happiness and his/her decision in line with the maximization of the utility. First, we find people who are highly conscious of others’ living standards are unhappier in Japan but happier in the U.S. This opposite effect between the two countries is also found to exist when the same estimation is conducted with panel data. Second, the positive relationship between relative consciousness and happiness found in the U.S. results from the perception of reference-group income: highly conscious people compare downward in the U.S. Lastly, we further examine the extent to which the integrated effect of relative consciousness and reference-group income is related to an individual’s decision that could affect the degree of happiness. We discuss how our results can drive a wedge between choice behavior and happiness maximization and thus between happiness and decision utility.
    Date: 2018–03
  6. By: Becker, Anke (Harvard University); Dohmen, Thomas (University of Bonn and IZA); Enke, Benjamin (Harvard University); Falk, Armin (briq Institute and University of Bonn); Huffman, David (University of Pittsburgh); Sunde, Uwe (LMU München)
    Abstract: This paper studies the global variation in economic preferences. For this purpose, we present the Global Preference Survey (GPS), an experimentally validated survey dataset of time preference, risk preference, positive and negative reciprocity, altruism, and trust from 80,000 individuals in 76 countries. The data reveal substantial heterogeneity in preferences across countries, but even larger within-country heterogeneity. Across individuals, preferences vary with age, gender, and cognitive ability, yet these relationships appear partly country specific. At the country level, the data reveal correlations between preferences and bio-geographic and cultural variables such as agricultural suitability, language structure, and religion. Variation in preferences is also correlated with economic outcomes and behaviors. Within countries and subnational regions, preferences are linked to individual savings decisions, labor market choices, and prosocial behaviors. Across countries, preferences vary with aggregate outcomes ranging from per capita income, to entrepreneurial activities, to the frequency of armed conflicts.
    Keywords: ;
    JEL: D01 D03 F00
    Date: 2018–03–09
  7. By: Barron, Kai
    Abstract: Bayes’ statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Recent research has questioned the use of Bayes’ rule in descriptive models of behavior, presenting evidence that people overweight ‘good news’ relative to ‘bad news’ when updating ego-relevant beliefs. In this paper, we present experimental evidence testing whether this ‘good-news, bad-news’ effect extends to belief updating in the domain of financial decision making, i.e. the domain of most applied economic decision making. We find no evidence of asymmetric updating in this domain. In contrast, the average participant in our experiment is strikingly close to Bayesian in her belief updating. However, we show that this average behavior masks substantial heterogeneity in updating behavior, but we find no evidence in support of a sizeable subgroup of asymmetric updators.
    Keywords: economic experiments; Bayes’ rule; belief updating; belief measurement; proper scoring rules; subjective probability, motivated beliefs
    JEL: C11 C91 D83
    Date: 2018–02–20
  8. By: Uschi Backes-Gellner; Holger Herz; Michael Kosfeld; Yvonne Oswald
    Abstract: Evidence suggests that acquiring human capital is related to better life outcomes, yet young peoples’ decisions to invest in or stop acquiring human capital are still poorly understood. We investigate the role of time and reference-dependent preferences in such decisions. Using a data set that is unique in its combination of real-world observations on student outcomes and experimental data on economic preferences, we find that a low degree of long-run patience is a key determinant of dropping out of upper-secondary education. Further, for students who finish education we show that one month before termination of their program, present-biased students are less likely to have concrete continuation plans while loss averse students are more likely to have a definite job offer already. Our findings provide fresh evidence on students’ decision-making about human capital acquisition and labor market transition with important implications for education and labor market policy.
    Keywords: economic preferences, education, dropout, human capital, job search
    JEL: D01 D03 D91 I21 J64
    Date: 2018
  9. By: Luciano de Castro (University of Iowa); Antonio F. Galvao (University of Arizona); David M. Kaplan (University of Missouri); Xin Liu (University of Missouri)
    Abstract: This paper develops theory for feasible estimators 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 illustrate the finite-sample properties of the methods. 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.
    Date: 2017–07
  10. By: Lise Clain-Chamosset-Yvrard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely-lived households, under the hypothesis of spirit of capitalism. I consider heterogeneous households in terms of preferences, endowments and initial wealth, and capture the spirit of capitalism through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest spirit of capitalism are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run, and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.
    Keywords: Asset pricing model, Spirit of Capitalism, Heterogeneity, Expectation-driven fluctuations
    Date: 2018
  11. By: Kocher, Martin (University of Vienna); Schindler, David (Tilburg University); Trautmann, Stefan (University of Heidelberg); Xu, Yilong (Uinversity of Heidelberg)
    Abstract: Time pressure is a central aspect of economic decision making nowadays. It is therefore natural to ask how time pressure affects decisions, and how to detect individual heterogeneity in the ability to successfully cope with time pressure. In the context of risky decisions, we ask whether a person\'s performance under time pressure can be predicted by measurable behavior and traits, and whether such measurement itself may be affected by selection issues. We find that the ability to cope with time pressure varies significantly across decision makers, leading to selected subgroups that differ in terms of their observed behaviors and personal traits. Moreover, measures of cognitive ability and intellectual efficiency jointly predict individuals\' decision quality and ability to keep their decision strategy under time pressure.
    Keywords: risk; cognitive ability; selection; time pressure;
    JEL: C91 D81
    Date: 2018–03–14
  12. By: Marcello Basili; Carlo Zappia
    Abstract: This paper presents an intuitive way to represent Keynes’s notion of long-term expectations and its implications for decision-making, using the so-called e-contamination approach. Further to a suggestion by Ellsberg, a coherent Keynesian expectational function for decisions under uncertainty is derived. The paper draws on the similarities between the analyses of Keynes and Ellsberg and contends that much of current decision theory under ambiguity follows in Keynes’s footsteps
    Keywords: uncertainty, expectations, Keynes, consensus distribution, epsilon-contamination
    JEL: B26 D81
    Date: 2018–02
  13. By: Geraldine Bocquého; Marc Deschamps; Jenny Helstroffer; Julien Jacob; Majlinda Joxhe
    Abstract: This paper uses the experimental setup of Tanaka et al. (2010) to measure refugees’ risk preferences. A sample of 206 asylum seekers was interviewed in 2017-18 in Luxembourg. Contrary to studies which focus on risk aversion in general, we analyze its components using a cumulative prospect theory (CPT) framework. We show that refugees exhibit particularly low levels of risk aversion compared to other populations and that CPT provides a better fit for modelling risk attitudes. Moreover, we include randomised temporary treatments provoking emotions and find a small significant impact on probability distortion. Robustness of the Tanaka et al. (2010) experimental framework is confirmed by including treatments regarding the embedding effect. Finally, we propose a theoretical model of refugee migration that integrates the insights from our experimental outcomes regarding the functional form of refugees’ decision under risk and the estimated parameter values. The model is then simulated using the data from our study.
    Keywords: Refugee migration, risk preferences, experimental economics, cumulative prospect theory, psychological priming.
    JEL: C93 D74 D81 D91 F22
    Date: 2018
  14. By: Asad Zaman (Pakistan Institute of Development Economics, Islamabad)
    Abstract: We show that the rationality arguments used to establish the existence of subjective probabilities depend essentially on the identification of acting-as-ifyou-believe and actually believing. We show that these two ideas, the pretense of knowledge about probabilities, and actual knowledge about probabilities, can easily be distinguished outside the restricted context of choice over special types of lotteries. When making choices over Savage-type lotteries, rational agents will act as if they know their subjective probabilities for uncertain events, but they will reveal their ignorance in other decision making contexts. This means that subjective probabilities cannot be assumed to exist, except when there is objective warrant for them.
    JEL: B40 C11
    Date: 2017
  15. By: Lorenzo Bastianello (LEMMA Universite Paris 2 Pantheon-Assas); Marco LiCalzi (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: We revisit the Nash bargaining model and axiomatize a procedural solution that maximizes the probability of successful bargaining. This probability-based approach nests both the standard and the ordinal Nash solution, and yet need not assume that bargainers have preferences over lotteries or that choice sets are convex. We consider both mediator-assisted bargaining and standard unassisted bargaining. We solve a long-standing puzzle and offer a natural interpretation of the product operator underlying the Nash solution. We characterize other known solution concepts, including the egalitarian and the utilitarian solutions.
    Keywords: cooperative bargaining, mediation, arbitration, benchmarking, copulas.
    JEL: C78 D81 D74
    Date: 2018–03
  16. By: Krawczyk, Michal; Trautmann, Stefan (Tilburg University, School of Economics and Management); van de Kuilen, Gijs (Tilburg University, School of Economics and Management)
    Abstract: We study behavioral patterns of insurance demand for low-probability large-loss events (catastrophic losses). Individual patterns of belief formation and risk attitude that were suggested in the behavioral decisions literature emerge robustly in the current set of insurance choices. However, social comparison effects are less robust. We do not find any evidence for peer effects (through social-loss aversion or imitation) on insurance take-up. In contrast, we find support for the prediction that people underweight others’ relevant information in their own decision making.
    Date: 2017
  17. By: Zhengqing Gui (Department of Economics , The Hong Kong University of Science and Technology); Yangguang Huang (Department of Economics , The Hong Kong University of Science and Technology; Institute of Emerging Market Studies, The Hong Kong University of Science and Technology); Xiaojian Zhao (Chinese University of Hong Kong (Shenzhen) and Hong Kong University of Science and Technology)
    Abstract: We study how investors are exploited by fraudulent financial products. These investors purchase financial products that are inconsistent with their risk attitudes, and in turn, their behaviors provide an incentive for firms to commit financial fraud. We then conduct experiments and surveys in Shenzhen, China to measure investors' risk preferences and the effect of an eye-opening financial education program. Participating in our education program significantly reduces investors' tendency to invest in fraudulent products, especially among those who are risk-averse. Therefore, compared to randomly assigning the education program to investors, targeting risk-averse investors will be more effective in fighting financial fraud.
    Date: 2018–01
  18. By: Glenn P. Jenkins (Queen's University, Canada and Eastern Mediterranean University, North Cyprus); Naghmeh Niroomand (Cambridge Resources International)
    Abstract: Introduction: The incidence of pedestrian death over the period 2010 to 2014 per 1000,000 in North Cyprus is about 2.5 times that of the EU, with 10.5 times more pedestrian road injuries than deaths. With the prospect of North Cyprus entering the EU, many investments need to be undertaken to improve road safety in order to reach EU benchmarks. Method: We conducted a stated choice experiment to identify the preferences and tradeoffs of pedestrians in North Cyprus for improved walking times, pedestrian costs, and safety. The choice of route was examined using mixed logit models to obtain the marginal utilities associated with each attribute of the routes that consumers chose. These were used to estimate the individuals’ willingness to pay (WTP) to save walking time and to avoid pedestrian fatalities and injuries. We then used the results to obtain community-wide estimates of the value of a statistical life (VSL) saved, the value of an injury (VI) prevented, and the value per hour of walking time saved.Results: The estimate of the VSL was €699,434 and the estimate of VI was €20,077. These values are consistent, after adjusting for differences in incomes, with the median results of similar studies done for EU countries. Conclusions: The ratio of deaths to injuries is much higher for pedestrians than for road accidents, and this is completely consistent with the higher WTP to avoid a pedestrian accident than that to avoid a car accident. Moreover, the value of risk reduction (VRR) is perfectly rational for a given reduction in the probability of a fatality and an injury, which means it is an increasing function of the initial risk level. Practical Applications: Findings provide a set of information on the VRR that is useful in the ex ante appraisal of road projects for specific policy measures.
    Keywords: Willingness to pay; choice experiment; value of a statistical life; value of an injury; road safety; pedestrians
    JEL: D12 C25 Q50 J17 R41
    Date: 2017–11
  19. By: Nigar Hashimzade
    Abstract: I analyse the solution method for the variational optimisation problem in the rational inattention framework proposed by Christopher A. Sims. The solution, in general, does not exist, although it may exist in exceptional cases. I show that the solution does not exist for the quadratic and the logarithmic objective functions analysed by Sims (2003, 2006). For a linear-quadratic objective function a solution can be constructed under restrictions on all but one of its parameters. This approach is, therefore, unlikely to be applicable to a wider set of economic models.
    Date: 2018–02
  20. By: Hiromasa Takahashi (Faculty of International Studies, Hiroshima City University); Junyi Shen (Research Institute for Economics and Business Administration (RIEB), Kobe University, Japan, and School of Economics, Shanghai University, China)
    Abstract: This study conducts experiments on dishonest behavior after anchoring the participants' expected reward to investigate the effect of anchoring on dishonest behavior. The experimental results show that those who are anchored to high reward behave less honestly than those anchored to low reward. This is because the anchoring changes participants' expected reward. Such a change in expected reward serve as participants' reference point to affect the likelihood of facing a loss frame where dishonest behaviors are more likely to occur.
    Keywords: Anchoring effect, Reference point, Dishonest behavior, Expected reward, Cheating, Risk attitude
    JEL: D40 D91
    Date: 2018–02
  21. By: Ashish R. Hota; Shreyas Sundaram
    Abstract: We consider a game-theoretic model where individuals compete over a shared failure-prone system or resource. We investigate the effectiveness of a taxation mechanism in controlling the utilization of the resource at the Nash equilibrium when the decision-makers have behavioral risk preferences, captured by prospect theory. We first observe that heterogeneous prospect-theoretic risk preferences can lead to counter-intuitive outcomes. In particular, for resources that exhibit network effects, utilization can increase under taxation and there may not exist a tax rate that achieves the socially optimal level of utilization. We identify conditions under which utilization is monotone and continuous, and then characterize the range of utilizations that can be achieved by a suitable choice of tax rate. We further show that resource utilization is higher when players are charged differentiated tax rates compared to the case when all players are charged an identical tax rate.
    Date: 2018–02
  22. By: Yang Wang; Dong Wang; Yaodong Wang; You Zhang
    Abstract: Portfolio selection is the central task for assets management, but it turns out to be very challenging. Methods based on pattern matching, particularly the CORN-K algorithm, have achieved promising performance on several stock markets. A key shortage of the existing pattern matching methods, however, is that the risk is largely ignored when optimizing portfolios, which may lead to unreliable profits, particularly in volatile markets. We present a risk-aversion CORN-K algorithm, RACORN-K, that penalizes risk when searching for optimal portfolios. Experiments on four datasets (DJIA, MSCI, SP500(N), HSI) demonstrate that the new algorithm can deliver notable and reliable improvements in terms of return, Sharp ratio and maximum drawdown, especially on volatile markets.
    Date: 2018–02
  23. By: Carolin Fritzsche; Lars Vandrei
    Abstract: We review the existing literature on the causes of vacancies in the housing market. First, we present a detailed overview of theoretical approaches that may explain the mechanisms causing vacancies under the assumptions of a standard market model, the search and matching theory and behavioral economics. Concerning the latter, we propose a new framework to explain vacancies in the housing market in the context of prospect theory which could be extended by future research. Second, we formulate hypotheses based on these theories regarding the causes and the extent of vacancies. Third, we evaluate the validity of the hypotheses by referring to the existing empirical literature while comparing the data, samples and methods employed in the various studies. The main findings of our literature review are (1) that there is considerable room to extend existing theoretical models and (2) that some hypotheses have either been investigated by the empirical literature only to a limited degree or have not been investigated at all. We also suggest that (3) a social welfare analysis that takes the specific type of vacancy into account is highly relevant for housing policy decisions.
    Keywords: Search frictions, matching, prospect theory, real estates, housing, vacancy
    JEL: D83 R21 R31
    Date: 2018
  24. By: Noe Wiener (Department of Economics, University of Massachusetts, Amherst and Department of Economics, The New School for Social Research, New York)
    Abstract: This paper proposes a measure of the intensity of competition in labor markets on the basis of limited data. Large-scale socioeconomic surveys often lack detailed information on competitive behavior. It is particularly difficult to determine whether a worker moves between the different segments of the labor market. Here, the Maximum Entropy principle is used to make inferences about the unobserved mobility decisions of workers in US household data. A class of models is proposed that reflects a parsimonious conception of competition in the Smithian tradition, as well as being consistent with a range of detailed behavioral models. The Quantal Response Statistical Equilibrium (QRSE) class of models can be seen to give robust microfoundations to the persistent patterns of wage inequality among equivalent workers. Furthermore, the QRSE effectively endogenizes the definition of labor market segments, allowing us to interpret the estimated competition intensities as partial measures of labor market segmentation. Models of this class generate predictions that capture between 97.5 and 99.5 percent of the informational content of the sample wage distributions. In addition to providing a very good fit to the wage data, the predictions are also consistent with bounded rationality of workers.
    Keywords: labor market competition, segmented labor markets, job mobility, wage inequality, statistical equilibrium, maximum entropy
    JEL: C18 J31 J42 J62
    Date: 2018
  25. By: Mann, Konstantin A.
    Abstract: The goal of this paper is to demonstrate and analyze the contradiction between the model of time preference and the concept of savoring and thereupon outline product categories that particularly apply to each one of the preceding models. Both concepts are discussed and exemplified in order to depict the contradiction. Subsequently, the terms utilitarian and hedonic goods are introduced in order to outline useful patterns for the correct assignment of goods to each model. The definition of utilitarian goods is applied to Maslow’s hierarchy of needs to show that they do particularly react to the model of time preference. Afterwards, existing knowledge about the concept of savoring is used in order to show the correlation between hedonic goods and the concept of savoring. Finally, the paper shows that companies can benefit from this categorization by either reacting to given distribution structures in terms of marketing or by identifying to which extent a certain product is perceived as utilitarian or hedonic good and correspondingly postpone or speed-up delivery.
    Keywords: Time preference; Savoring; Discounting; Anticipatory utility
    JEL: B26
    Date: 2018–02–11
  26. By: David Yechiam Aharon (Ono Academic College); Mahmoud Qadan (Univeristy of Haifa)
    Abstract: Many studies dealing with calendar market anomalies have ascribed positive or negative patterns detected in returns to investors? moods. However, in these studies, mood was not measured directly but rather speculated upon or inferred. This paper suggests capturing investors? moods by dividing the information contained in the VIX, popularly called the fear index, into two components: that which is correlated with volatility forecasts and information that is not. By doing so, we provide further evidence about the relationship between investor mood and risk aversion around joyful occasions (holidays) as well as for other occasions that may result in negative moods (the disruption of sleep resulting from the move to and from daylight savings time). We find that the actual values of the VIX and its cousin, the VXO, tend to be lower than their expected values in the case of joyful holidays, reflecting a more optimistic mood among investors, while during daylight savings time weekends, the actual values of the VIX and VXO tend to be higher than their theoretical values. Our results shed light on the information content of implied volatility beyond that captured in other volatility estimators.
    Keywords: Financial markets; Mood; Behavioral finance; Holiday effect, Risk aversion, Stock returns
    JEL: G10 G02 G14
    Date: 2017–10

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