nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2018‒10‒08
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Giving to Varying Numbers of Others By Matthew Robson; John Bone
  2. Robust Inference in Risk Elicitation Tasks By Ola Andersson; Håkan J. Holm; Jean-Robert Tyran; Erik Wengström
  3. Measuring Risk Aversion Using Indirect Utility Functions: A Laboratory Experiment By Zeytoon Nejad Moosavian, Seyyed Ali; Hammond, Robert; Goodwin, Barry K.
  4. Claiming the Usefulness of Relative Welfare Indicators in General Equilibrium Analysis:A Comprehensive Comparison of VAT Reforms. By Ana-Isabel Guerra
  5. Optimal investment and consumption for Ornstein-Uhlenbeck spread financial markets with logarithmic utility By Sahar Albosaily; Serguei Pergamenshchikov
  6. Standard Risk Aversion and Efficient Risk Sharing By Suen, Richard M. H.
  7. Risk Aversion and the Willingness to Migrate in 30 Countries By Peter Huber; Klaus Nowotny
  8. Expectations, Price Fluctuations and Lorenz Attractor By Olkhov, Victor
  9. Farmers’ valuation of changes to crop insurance coverage level – a test of third generation prospect theory By Doidge, Mary; Feng, Hongli; Hennessy, David A.

  1. By: Matthew Robson; John Bone
    Abstract: Within a modified N person dictator game, we test the extent to which giving behaviour changes as the number of recipients varies. Using a within-subject design, in an incentivised laboratory experiment, individual-level preference parameters are estimated within five alternative utility functions. Both goodness-of-fit and predictive accuracy of each model are analysed, with the "best" model identified for each individual. The Dirichlet distribution is proposed as a random behavioural model to rationalise noise; with parameters accounting for differential error arising from the complexity of decision problems. Results show that, on average, participants are willing to give more total payoffs to others as the number of players increase, but not maintain average payoffs to others. Extensive heterogeneity is found in individual preferences, with no model "best" fitting all individuals.
    Keywords: Distributional Preferences, Prosocial Behaviour, Group Size, Experimental Economics, Altruism, Social Welfare Function.
    JEL: C72 C91 D63 D64 I31
    Date: 2018–10
  2. By: Ola Andersson (Uppsala University and IFN); Håkan J. Holm (Lund University, Department of Economics); Jean-Robert Tyran (University of Vienna, Department of Economics and University of Copenhagen, Department of Economics); Erik Wengström (University of Vienna, Department of Economics and University of Copenhagen, Department of Economics)
    Abstract: Recent experimental evidence suggests that noisy behavior correlates strongly with cognitive ability. This puts previous studies that found a negative relation between cognitive ability and risk aversion into perspective and in particular raises the question of how to achieve robust inference in this domain. This paper shows that using structural estimation that models heterogeneity of noise in combination with a balanced design allows us to mitigate the bias problem. Our estimations show that cognitive ability is related to noisy behavior rather than risk preferences. We also find age and education to be strongly related to noise, but the personality characteristics obtained using the Big Five inventory, are less related to noise and more robustly correlated to risk preferences.
    Keywords: Risk preference, cognitive ability, experiment, noise
    JEL: C81 C91 D81
    Date: 2018–09–26
  3. By: Zeytoon Nejad Moosavian, Seyyed Ali; Hammond, Robert; Goodwin, Barry K.
    Keywords: Experimental Economics, Risk and Uncertainty, Behavioral & Institutional Economics
    Date: 2018–06–20
  4. By: Ana-Isabel Guerra
    Abstract: The evaluation of welfare effects should be clear and presented in an easy to interpret manner. In this paper, we show that on these grounds the true index of cost of living, first introduced by Konüs (1939), is preferable to the standard absolute indicators when evaluating welfare effects in static applied general equilibrium models i.e. the equivalent and the compensated variations. In these applied models, it is customary to use linearly homogeneous utility functions such as Cobb-Douglas or the more general CES specification. Under this class of utilities, the Konüs index is independent of the reference level of utility. This makes this index an unambiguous cost of living indicator. Lastly, to show the convenience of using the Konüs index in empirical work, we have carried out an original exercise with a novel data set for the Spanish economy. We report the macroeconomic and welfare impacts of two alternative Value-Added Tax Reforms through the application of an original simulation strategy.
    Keywords: Cost of living indices, applied general equilibrium analysis, tax reforms, fiscal policies.
    JEL: D58 D69 E62
    Date: 2018–10–01
  5. By: Sahar Albosaily; Serguei Pergamenshchikov
    Abstract: We consider a spread financial market defined by the multidimensional Ornstein--Uhlenbeck (OU) process. We study the optimal consumption/investment problem for logarithmic utility functions in the base of stochastic dynamical programming method. We show a special Verification Theorem for this case. We find the solution to the Hamilton--Jacobi--Bellman (HJB) equation in explicit form and as a consequence we construct the optimal financial strategies. Moreover, we study the constructed strategy by numerical simulations.
    Date: 2018–09
  6. By: Suen, Richard M. H.
    Abstract: This paper analyzes the risk attitude and investment behavior of a group of heterogeneous consumers who face an uninsurable background risk. It is shown that standard risk aversion at the individual level does not imply standard risk aversion at the group level under efficient risk sharing. This points to a potential divergence between individual and collective investment choices in the presence of background risk. We show that if the members' absolute risk tolerance is increasing and satisfies a strong form of concavity, then the group has standard risk aversion.
    Keywords: Standard risk aversion; Efficient risk sharing; Background risk; Portfolio choice.
    JEL: D70 D81 G11
    Date: 2018–09–06
  7. By: Peter Huber (WIFO); Klaus Nowotny (WIFO)
    Abstract: We use individual level data covering 30 mostly post-communist and developing countries which account for over a fifth of the worldwide immigrant stock to assess the impact of risk aversion on the willingness to migrate. Consistent with theories of individual level migration decisions, risk aversion has a statistically significant negative impact on both the willingness to migrate within countries as well as abroad. This applies to virtually all countries considered and is robust across various specifications, to alternative measures of risk aversion and to different measures of the willingness to migrate. Differences in the impact of risk aversion on the willingness to migrate are also positively correlated to measures of sending country risks and the missing variable bias of omitting risk aversion from migration regressions is substantial.
    Keywords: Migration intentions, Risk Aversion, Former Communist Countries
    Date: 2018–10–01
  8. By: Olkhov, Victor
    Abstract: This paper describes expectations and Buy-Sell transactions of selected Stokes between economic agents and Exchange on economic space as ground for modeling trading volume and price fluctuations. We study simple model of mutual relations between transactions and expectations and derive economic equations that describe disturbances of price, trading volume and expectations. We obtain simple harmonic oscillations for price fluctuations. We show that our model economic equations can take form of Lorenz attractor. Our approximation of transactions and expectations and economic equations on disturbances of price, trading volume and expectations allows apply dynamical systems methods for modeling chaotic behavior of economic and financial systems.
    Keywords: Financial Transactions; Expectations; Economic Space; Stochastic Prices
    JEL: C60 E00 E30 G02 G12 G17
    Date: 2018–09–20
  9. By: Doidge, Mary; Feng, Hongli; Hennessy, David A.
    Keywords: Risk and Uncertainty, Behavioral & Institutional Economics, Production Economics
    Date: 2018–06–20

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