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on Utility Models and Prospect Theory |
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Issue of 2019‒06‒24
twelve papers chosen by |
| By: | Miura, Takahiro (Kansai University); Inukai, Kengo (Meiji Gakuin University); Sasaki, Masaru (Osaka University) |
| Abstract: | Our paper conducts laboratory experiments with the sequential search model to test whether participants engage in search activities in line with theoretical predictions derived from the expected utility model or the reference-dependent model, without assuming any specific formulation rule for a reference point. Our experimental results showed that the participants' search behavior did not align with the reference-dependent model. In addition, the correlation between individual preferences and search behavior reinforced our experimental results; that is, loss aversions were not significantly correlated with search behavior. |
| Keywords: | risk preference, loss aversion, sequential search |
| JEL: | D81 D83 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12378&r=all |
| By: | Ha-Huy, Thai |
| Abstract: | The famous theorem of Savage is based on the richness of the states space, by assuming a \textit{continuum} nature for this set. In order to fill the gap, this article considers Savage's theorem with discrete state space. The article points out the importance the existence of pair event in the existence of utility function and the subjective probability. Under the discrete states space, this can be ensured by the intuitive \textit{atom swarming} condition. Applications for the establishment of an inter-temporal evaluation \emph{\`a la } Koopman \cite{K60}, \cite{K72}, and for the configuration under \textit{unlikely atoms} of Mackenzie \cite{Mackenzie2018} are provided. |
| Keywords: | Savage theorem, Koopman representation, expected utility function, atom swarming. |
| JEL: | C00 D10 D90 |
| Date: | 2019–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94516&r=all |
| By: | Bar Light |
| Abstract: | We study a pure-exchange incomplete markets model with heterogeneous agents. In each period, the agents choose how much to save and which bundle of goods to consume while their endowments are fluctuating. We focus on a competitive stationary equilibrium (CSE) in which the wealth distribution is invariant, the agents maximize their expected discounted utility, and both the prices of goods and the interest rate are market-clearing. Our main contribution is to extend some general equilibrium results to an incomplete markets setting. Under mild conditions on the agents' preferences, we show that the aggregate demand for goods depends only on their relative prices and we prove the existence of a CSE. When the agents' preferences can be represented by a CES (constant elasticity of substitution) utility function with an elasticity of substitution that is higher than or equal to one, we prove that the CSE is unique. Under the same preferences, we show that a higher inequality of endowments does not change the equilibrium prices of goods, and decreases the equilibrium interest rate. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1906.06810&r=all |
| By: | Guillermo Alves (CAF, Banco de Desarrollo de América Latina); Pablo Blanchard (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriel Burdín (The University of Leeds); Mariana Chávez (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Andrés Dean (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía) |
| Abstract: | A growing body of research has been investigating the role of management practices and managerial behaviour in conventional private firms and public sector organizations. However, little is known about managers’ behavioural profile in noninvestor-owned firms. This paper aims to fill this gap by providing a comprehensive behavioural characterization of managers employed in cooperatives. We gathered incentive-compatible measures of risk preferences, time preferences, reciprocity, altruism, and trust from 196 Uruguayan managers (half of them employed in worker cooperatives) and 92 first-year undergraduate students. To do this, we conducted a high-stakes lab-in-the-field experiment in which participants played a series of online experimental games and made incentivised decisions. The average payoff in the experiment was approximately 2.5 times higher than the average local managerial wage in the private sector. Our key findings are that (1) the fraction of risk loving subjects is lower among co-op managers compared to conventional managers, and (2) co-op managers appear to be more altruistic than their conventional counterparts. Interestingly, we do not observe significant differences between the two groups across other preference domains, such as impatience, trust, and reciprocity. |
| Keywords: | risk-aversion, time preferences, altruism, reciprocity, trust, lab-in-the-field experiment, managers, cooperatives |
| JEL: | C90 D81 J54 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ulr:wpaper:dt-08-19&r=all |
| By: | Piotr Orłowski (HEC Montreal); Paul Schneider (University of Lugano - Institute of Finance; Swiss Finance Institute); Fabio Trojani (Swiss Finance Institute; University of Geneva) |
| Abstract: | We shed light on the nature of jump risk compensation by studying the profits from a trading strategy that bets on the high-frequency jump skew of S&P 500 returns. Earlier evidence suggests the jump risk premium is large and positive. We find it to be concentrated in periods when the index option market is closed, and investors cannot trade options. Whenever jump skew can be traded continuously, the premium vanishes. We conclude the jump skew premium in index options is not compensation for the risk of occasional, large returns, but for the investors’ inability to adjust their nonlinear risk exposure. |
| Keywords: | rare events, jump risk premium, options, high-frequency data |
| JEL: | G10 G12 C58 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1931&r=all |
| By: | Ojeda-Joya, Jair |
| Abstract: | We study whether the implications of an international consumption-based asset-pricing model are useful to provide out-sample predictability evidence for the real exchange rate. This model implies a predictability equation that results from the presence of both internal and external consumption habits in the utility function. In this equation, domestic, U.S. and world consumption growth are predictors of the real exchange rate. Our empirical exercises confirm this connection by providing evidence of short-term predictability on the bilateral rates of 15 out of 17 countries vis-à-vis the U.S. over the post Bretton-Woods float. A non-linear GMM estimation of some parameters of the model also brings about evidence of the presence of consumption habits in the utility function. |
| Keywords: | exchange rates, out-of-sample, predictability, asset pricing, habits |
| JEL: | C53 F31 F47 G15 |
| Date: | 2019–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94231&r=all |
| By: | Jordi Brandts (Institute for Economic Analysis, CSIC, Barcelona); Klarita Gërxhani (European University Institute); Arthur Schram (University of Amsterdam) |
| Abstract: | Competition involves two dimensions, rivalry for resources and social-status ranking. In our experiment we exclude the first dimension and investigate gender differences in the preference for status ranking. Participants perform a task under non-rivalry incentives. Before doing so, individuals indicate whether they prefer to do the task in an environment with social-status ranking or one without, knowing whether or not the choice will be imposed upon the whole group (as opposed to being personal) and whether the ranking will be done by a man or a woman. We find no gender difference in mean status-ranking aversion when the ranking is personal. When the ranking is imposed, there are still no gender differences in the preferences for social ranking when the ranker is a women, and women are not affected by the ranker’s gender. With a male ranker, however, men have a much stronger desire to be ranked than with a female ranker. |
| Keywords: | status ranking, competition, gender |
| JEL: | C91 J16 |
| Date: | 2019–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190041&r=all |
| By: | David Bruner; Caleb Cox; David M. McEvoy; Brock Stoddard |
| Abstract: | We examine motives for over-bidding in contests using both individual and team contests. In team contests, subject pairs send suggested bids and messages to their teammates. Content analysis of the messages provides insight into an individual’s bidding motives. In addition, we elicit measures of preferences, beliefs, and impulsiveness. We ?nd that beliefs about others’ bids and messages that emphasize winning (i.e., utility of winning) are the most robust predictors of over-bidding. Our results suggest that analyzing communication provides a rich window into an individual’s thought process when making decisions, and can complement insights from elicited values from common decision tasks. Key Words: Tullock contest, lottery contest, winner-take-all, two-headed contest, team contest, strategic thinking, communication, overbidding |
| JEL: | C92 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:19-08&r=all |
| By: | Süß, Theresa |
| Abstract: | [Zielsetzung und Aufbau der Arbeit] Ziel der vorliegenden Arbeit ist es, einen differenzierten Überblick über relevante verhaltensökonomische Theorien und Konzepte herzustellen und diese in den Rahmen des Ernährungsverhaltens einzuordnen. Anhand der Praxisstudie soll ein Verständnis dafür geschaffen werden, wie Mensabesucher der Hochschule Pforzheim Kauf- und Ernährungsentscheidungen treffen und inwiefern diese durch Nudging beeinflussbar sind. Zu Beginn soll eine grobe Zusammenfassung über verschiedene Aspekte der Ernährungsweise innerhalb der deutschen Bevölkerung stattfinden (Kapitel 2.1). In diesem Zusammenhang wird erläutert, was unter einer gesunden Ernährung verstanden wird und worin Gründe für das Scheitern einer solchen liegen können (Kapitel 2.2). Damit soll die Relevanz von Nudging im Ernährungsbereich aufgezeigt werden. Anschließend folgt eine Einführung in die Verhaltensökonomik (Kapitel 3.1). Dabei wird auf das traditionelle Bild eines Konsumenten eingegangen und argumentiert, weshalb dieses durch Behavioral Economics revolutioniert wurde (Kapitel 3.2). Des Weiteren wird auf das begrenzt rationale Handeln des Menschen eingegangen. Hier spielt beispielsweise die (fehlende) Selbstkontrolle eine bedeutende Rolle (Kapitel 3.3.1) sowie psychologische Effekte wie die Zeitinkonsistenz, das hyperbolische Diskontieren (Kapitel 3.3.2) und der Überoptimismus (Kapitel 3.3.3). Es wird dabei jeweils beispielhaft auf das Ernährungsverhalten Bezug genommen. Nachfolgend werden ausgewählte Heuristiken beziehungsweise Bias vorgestellt, die für die Forschungsfrage der Arbeit als besonders relevant erachtet werden. Dazu gehören das Anchoring (Kapitel 3.4.2), das Framing (Kapitel 3.4.3) sowie der Status-Quo-Bias (Kapitel 3.4.4). Im nächsten Kapitel wird das Konzept des Nudging definiert und erklärt (Kapitel 4.1). Dazu werden zum einen verschiedene Arten des Nudging hervorgehoben (Kapitel 4.2) und zum anderen relevante Beispiele aus der Literatur analysiert (Kapitel 4.3). Dies soll als Überleitung zum Praxisteil der Arbeit dienen. Kapitel 5 beschäftigt sich dann mit der konkreten Untersuchung von ausgewählten Nudges und dessen Auswirkung auf das Ernährungsverhalten der Studierenden, Professoren und Mitarbeitern1 der Hochschule Pforzheim. Hierbei wird anhand eines Feldexperiments und Interviews der Frage nachgegangen, ob Nudging in der Pforzheimer Hochschulmensa als sinnvoll erachtet werden kann. Danach erfolgt eine Diskussion, wie weit Nudging generell gehen sollte und inwiefern dabei politische, legale und ethische Aspekte eine Rolle spielen. Dazu wird der libertäre Paternalismus erklärt und kritisch betrachtet (Kapitel 6.1). Außerdem folgt eine Erörterung über die Debatte staatlicher Eingriffe im Sinne des Nudging (Kapitel 6.2). Abschließend werden im Fazit die wichtigsten Erkenntnisse zusammengefasst (Kapitel 7.1) und die vorliegende Arbeit wird kritisch reflektiert (Kapitel 7.2). Des Weiteren wird ein kurzer Ausblick hinsichtlich des Themas gegeben (Kapitel 7.3). |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:pfobei:171&r=all |
| By: | Viswanathan, Madhu; Li, Xiaolin; John, George; Narasimhan, Om |
| Abstract: | The pervasive use of merchandise (i.e., non-cash) incentives in sales compensation plans is an empirical and theoretical puzzle given the supposed superiority of cash incentives in the standard theory (i.e., principal-agent models) and the scant, and contradictory empirical evidence. We conducted a large scale field intervention that switched 580 salespeople at a large frozen food manufacturer away from their cash plus “ merchandise points” bonus to a commensurate all-cash bonus. After controlling for salesperson, seasonality, year, and target effects, we estimated that sales, on average, dropped by 4.36%. Further, we estimated individual-level sales changes and effort changes to validate our incentive-effort-sales causal chain. Our results show that the top salespeople experienced the largest drops. A post-intervention survey of social and individual difference variables reveals that salespeople from households with more discretionary financial resources, and those who think more abstractly about the uses of cash income exhibited smaller reductions in effort and sales. While the absence of a control group prevents us from making strong causal inferences, this set of results nevertheless provides descriptive and suggestive evidence for separate mental accounts as the most promising explanation for the greater utility provided by merchandise incentives. |
| Keywords: | Incentives; non-monetary compensation; field experiments; salesforce; mental accounting |
| JEL: | J50 |
| Date: | 2018–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:87158&r=all |
| By: | Marcin Pitera; {\L}ukasz Stettner |
| Abstract: | In this paper long-run risk sensitive optimisation problem is studied with dyadic impulse control applied to continuous-time Feller-Markov process. In contrast to the existing literature, focus is put on unbounded and non-uniformly ergodic case by adapting the weight norm approach. In particular, it is shown how to combine geometric drift with local minorisation property in order to extend local span-contraction approach when the process as well as the linked reward/cost functions are unbounded. For any predefined risk-aversion parameter, the existence of solution to suitable Bellman equation is shown and linked to the underlying stochastic control problem. For completeness, examples of uncontrolled processes that satisfy the geometric drift assumption are provided. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1906.06389&r=all |
| By: | Evgeny Lyandres (Boston University); Maria‐Teresa Marchica (University of Manchester - Alliance Manchester Business School); Roni Michaely (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute); Roberto Mura (University of Manchester - Manchester Business School) |
| Abstract: | Portfolio diversification of firms' controlling owners influences their firms' capital investment. Empirically, the effect of owners' portfolio diversification on their firms' investment levels is positive for publicly-traded firms and tends to be negative for privately-held ones. These findings are consistent with predictions of a model in which a risk-averse investor simultaneously chooses her portfolio structure, and the level and riskiness of capital investment of the firm she controls, and in which the firm can be potentially constrained in its capital investment choices. Overall, our results indicate that owners' portfolio underdiversification and firms' financial constraints can impact firms' resource allocation. |
| Keywords: | diversification, strategies, private firms |
| JEL: | G11 G15 G31 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1912&r=all |