
on Utility Models and Prospect Theory 
By:  Heller, Yuval; NEHAMA, Ilan 
Abstract:  We examine evolutionary basis for risk aversion with respect to aggregate risk. We study populations in which agents face choices between aggregate risk and idiosyncratic risk. We show that the choices that maximize the longrun growth rate are induced by a heterogeneous population in which the least and most risk averse agents are indifferent between aggregate risk and obtaining its linear and harmonic mean for sure, respectively. Moreover, an approximately optimal behavior can be induced by a simple distribution according to which all agents have constant relative risk aversion, and the coefficient of relative risk aversion is uniformly distributed between zero and two. 
Keywords:  Evolution of preferences, risk interdependence, longrun growth rate. 
JEL:  D81 
Date:  2021–10–13 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:110194&r= 
By:  David Crainich (LEM  Lille économie management  UMR 9221  UA  Université d'Artois  UCL  Université catholique de Lille  Université de Lille  CNRS  Centre National de la Recherche Scientifique); Louis Eeckhoudt; Olivier Le Courtois 
Abstract:  Bivariate risk apportionment is the preference for dispersing risks associated with two aspects of individuals' wellbeing into different states of the world. In this paper, we propose an intensity measure of this preference by extending to the bivariate case the concept of marginal rate of substitution between risks of different orders introduced in the univariate case by Liu and Meyer (2013). We show that the intensity measure of the preference for bivariate risk apportionment is characterized by bivariate risk attitudes in the sense of Ross. The usefulness of our measures to understand economic choices is illustrated by the analysis of two specific decisions: savings under environmental risk and medical treatment in the presence of diagnostic risks. 
Keywords:  Bivariate utility function,Increase in bivariate risks,Risk apportionment,Comparative risk aversion,Ross risk aversion 
Date:  2020–05 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal03133126&r= 
By:  Holden, Stein T. (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Tilahun, Mesfin (Centre for Land Tenure Studies, Norwegian University of Life Sciences) 
Abstract:  While economists in the past tended to assume that individual preferences, including risk preferences, are stable over time, a recent literature has developed that indicate that risk preferences respond to shocks. This paper combines survey data and field experiments with three different tools that facilitated elicitation of disaggregated measures of risk preferences, including utility curvature, probability weighting and loss aversion. By treating the recent shocks as natural experiments, the study assessed the sensitivity of each of these risk preference measures to the recent idiosyncratic and covariate (drought) shocks among a sample of resourcepoor young adults living in a semiarid rural environment in SubSaharan Africa. The results show that the disaggregated risk preference measures revealed substantial shock effects that were undetected when relying on a tool that elicited only one single measure of risk tolerance. Both the timing and covariate nature of the shocks affected the disaggregated measures of risk preferences differently, pointing towards the need for further studies of this kind in different contexts. 
Keywords:  Covariate shocks; Idiosyncratic shocks; Stability of risk preference parameters; Field experiment; Ethiopia 
JEL:  C93 D81 
Date:  2021–10–14 
URL:  http://d.repec.org/n?u=RePEc:hhs:nlsclt:2021_005&r= 
By:  Andreasen, Martin M.; Caggiano, Giovanni; Castelnuovo, Efrem; Pellegrino, Giovanni 
Abstract:  This paper uses a nonlinear vector autoregression and a nonrecursive identification strategy to show that an equalsized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences and approximated to third order around its risky steady state replicates these statedependent responses. The key mechanism behind this result is that firms display a stronger upward nominal pricing bias in recessions than in expansions, because recessions imply higher inflation volatility and higher marginal utility of consumption than expansions. 
Date:  2021–10–05 
URL:  http://d.repec.org/n?u=RePEc:bof:bofrdp:2021_013&r= 
By:  Tizié Bene (AMSE  AixMarseille Sciences Economiques  EHESS  École des hautes études en sciences sociales  ECM  École Centrale de Marseille  CNRS  Centre National de la Recherche Scientifique  AMU  Aix Marseille Université); Yann Bramoullé (AMSE  AixMarseille Sciences Economiques  EHESS  École des hautes études en sciences sociales  ECM  École Centrale de Marseille  CNRS  Centre National de la Recherche Scientifique  AMU  Aix Marseille Université); Frédéric Deroïan (AMSE  AixMarseille Sciences Economiques  EHESS  École des hautes études en sciences sociales  ECM  École Centrale de Marseille  CNRS  Centre National de la Recherche Scientifique  AMU  Aix Marseille Université) 
Abstract:  We study how altruism networks affect the adoption of formal insurance. Agents have private CARA utilities and are embedded in a network of altruistic relationships. Incomes are subject to both a common shock and a large idiosyncratic shock. Agents can adopt formal insurance to cover the common shock. We show that expost altruistic transfers induce interdependence in exante adoption decisions. We characterize the Nash equilibria of the insurance adoption game. We show that adoption decisions are substitutes and that the number of adopters is unique in equilibrium. The demand for formal insurance is lower with altruism than without at low prices, but higher at high prices. Remarkably, individual incentives are aligned with social welfare. We extend our analysis to CRRA utilities and to a fixed utility cost of adoption. 
Keywords:  Formal Insurance,Informal Transfers,Altruism Networks 
Date:  2021–09 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:halshs03355219&r= 
By:  Michelle Escobar Carias; David Johnston; Rachel Knott; Rohan Sweeney 
Abstract:  The empirical evidence suggests that key accumulation decisions and risky choices associated with economic development depend, at least in part, on economic preferences such as willingness to take risk and patience. This paper studies whether temperature could be one of the potential channels that influences such economic preferences. Using data from the Indonesia Family Life Survey and NASAs Modern Era Retrospective Analysis for Research and Applications data we exploit quasi exogenous variations in outdoor temperatures caused by the random allocation of survey dates. This approach allows us to estimate the effects of temperature on elicited measures of risk aversion, rational choice violations, and impatience. We then explore three possible mechanisms behind this relationship, cognition, sleep, and mood. Our findings show that higher temperatures lead to significantly increased rational choice violations and impatience, but do not significantly increase risk aversion. These effects are mainly driven by night time temperatures on the day prior to the survey and less so by temperatures on the day of the survey. This impact is quasi linear and increasing when midnight outdoor temperatures are above 22C. The evidence shows that night time temperatures significantly deplete cognitive functioning, mathematical skills in particular. Based on these findings we posit that heat induced night time disturbances cause stress on critical parts of the brain, which then manifest in significantly lower cognitive functions that are critical for individuals to perform economically rational decision making. 
Date:  2021–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2110.05611&r= 
By:  Thomas M\"obius; Iegor Riepin; Felix M\"usgens; Adriaan H. van der Weijde 
Abstract:  Flexibility options, such as demand response, energy storage and interconnection, have the potential to reduce variation in electricity prices between different future scenarios, therefore reducing investment risk. Moreover, investment in flexibility options can lower the need for generation capacity. However, there are complex interactions between different flexibility options. In this paper, we investigate the interactions between flexibility and investment risk in electricity markets. We employ a largescale stochastic transmission and generation expansion model of the European electricity system. Using this model, we first investigate the effect of risk aversion on the investment decisions. We find that the interplay of parameters leads to (i) more investment in a less emissionintensive energy system if planners are risk averse (hedging against CO2 price uncertainty) and (ii) constant total installed capacity, regardless of the level of risk aversion (planners do not hedge against demand and RES deployment uncertainties). Second, we investigate the individual effects of three flexibility elements on optimal investment levels under different levels of risk aversion: demand response, investment in additional interconnection capacity and investment in additional energy storage. We find that that flexible technologies have a higher value for riskaverse decisionmakers, although the effects are nonlinear. Finally, we investigate the interactions between the flexibility elements. We find that riskaverse decisionmakers show a strong preference for transmission grid expansion once flexibility is available at low cost levels. 
Date:  2021–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2110.04088&r= 
By:  Joop Adema; Till Nikolka; Panu Poutvaara; Uwe Sunde; Joop Age Harm Adema 
Abstract:  We exploit the unique design of a repeated survey experiment among students in four countries to explore the stability of risk preferences in the context of the COVID19 pandemic. Relative to a baseline before the pandemic, we find that selfassessed willingness to take risks decreased while the willingness to take risks in an incentivized lottery task increased, for the same sample of respondents. These findings suggest domain specificity of preferences that is partly reflected in the different measures. 
Keywords:  stability of risk preferences, measurement of risk aversion, Covid19 
JEL:  D12 D91 G50 
Date:  2021 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_9332&r= 
By:  Xiaojun Song; Haoyu Wei 
Abstract:  We propose consistent nonparametric tests of conditional independence for time series data. Our methods are motivated from the difference between joint conditional cumulative distribution function (CDF) and the product of conditional CDFs. The difference is transformed into a proper conditional moment restriction (CMR), which forms the basis for our testing procedure. Our test statistics are then constructed using the integrated moment restrictions that are equivalent to the CMR. We establish the asymptotic behavior of the test statistics under the null, the alternative, and the sequence of local alternatives converging to conditional independence at the parametric rate. Our tests are implemented with the assistance of a multiplier bootstrap. Monte Carlo simulations are conducted to evaluate the finite sample performance of the proposed tests. We apply our tests to examine the predictability of equity risk premium using variance risk premium for different horizons and find that there exist various degrees of nonlinear predictability at midrun and longrun horizons. 
Date:  2021–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2110.04847&r= 
By:  Gabriel Borrageiro; Nick Firoozye; Paolo Barucca 
Abstract:  We conduct a detailed experiment on major cash fx pairs, accurately accounting for transaction and funding costs. These sources of profit and loss, including the price trends that occur in the currency markets, are made available to our recurrent reinforcement learner via a quadratic utility, which learns to target a position directly. We improve upon earlier work, by casting the problem of learning to target a risk position, in an online learning context. This online learning occurs sequentially in time, but also in the form of transfer learning. We transfer the output of radial basis function hidden processing units, whose means, covariances and overall size are determined by Gaussian mixture models, to the recurrent reinforcement learner and baseline momentum trader. Thus the intrinsic nature of the feature space is learnt and made available to the upstream models. The recurrent reinforcement learning trader achieves an annualised portfolio information ratio of 0.52 with compound return of 9.3%, net of execution and funding cost, over a 7 year test set. This is despite forcing the model to trade at the close of the trading day 5pm EST, when trading costs are statistically the most expensive. These results are comparable with the momentum baseline trader, reflecting the low interest differential environment since the the 2008 financial crisis, and very obvious currency trends since then. The recurrent reinforcement learner does nevertheless maintain an important advantage, in that the model's weights can be adapted to reflect the different sources of profit and loss variation. This is demonstrated visually by a USDRUB trading agent, who learns to target different positions, that reflect trading in the absence or presence of cost. 
Date:  2021–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:2110.04745&r= 