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on Utility Models and Prospect Theories |
| By: | Paola Manzini (Queen Mary, University of London and IZA); Marco Mariotti (Queen Mary, University of London) |
| Abstract: | We study and test a class of boundedly rational models of decision making which rely on sequential eliminative heuristics. We formalize two sequential decision procedures, both inspired by plausible models popular among several psychologists and marketing scientists. However we follow a standard `revealed preference' economic approach by fully characterizing these procedures by few, simple and testable conditions on observed choice. Then we test the models (as well as the standard utility maximization model) with experimental data. We find that the large majority of individuals behave in a way consistent with one of our procedures, and inconsistent with the utility maximization model. |
| Keywords: | Bounded rationality, Choice experiments |
| JEL: | C91 D9 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp561&r=upt |
| By: | Bruce Headey |
| Abstract: | An adequate theory of happiness or subjective well-being (SWB) needs to link at least three sets of variables: stable person characteristics (including personality traits), life events and measures of well-being (life satisfaction, positive affects) and ill-being (anxiety, depression, negative affects). It also needs to be based on long term data in order to account for long term change in SWB. By including personality measures in the 2005 survey, SOEP becomes the first available dataset to provide long term evidence about personality, life events and change in one key measure of SWB, namely life satisfaction. Using these data, the paper suggests a major revision the set point or dynamic equilibrium theory of SWB in order to account for long term change (Brickman and Campbell, 1971; Costa and McCrae, 1980; Headey and Wearing, 1989; Lykken and Tellegen, 1996). Previously, theory focused on evidence that individuals have their own equilibrium level set point of SWB and revert to that equilibrium once the psychological impact of major life events has dissipated. But the new SOEP panel data show that small but non-trivial minorities record substantial and apparently permanent upward or downward changes in SWB. The paper aims to explain why most people's SWB levels do not change, but why a minority do. The main new result, which must be regarded as highly tentative until replicated, is that the people most likely to record large changes in life satisfaction are those who score high on the personality traits of extraversion (E) and/or neuroticism (N) and/or openness to experience (O). These people in a sense 'roll the dice' more often than others and so have a higher than average probability of recording long term changes in life satisfaction. Data come from the 2843 SOEP respondents who rated their life satisfaction every year from 1985 onwards and then also completed a set of questions about their personality in 2005. |
| Keywords: | Happiness research, theory of happiness, SOEP |
| JEL: | I31 Z19 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp607&r=upt |
| By: | Tigran Poghosyan; Evzen Kocenda |
| Abstract: | This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a model economy. The analysis is performed using weekly data on foreign and domestic currency deposits in the Armenian banking system. Results of the study indicate that contrary to the established view there is a positive correspondence between exchange rate depreciation and interest rate differentials. Further, it is shown that a systematic positive risk premium required by economic agents for foreign exchange transactions increases over the investment horizon. One-factor two-currency affine term structure framework applied in the paper is not sufficient to explain the driving forces behind the positive exchange rate risk premium. GARCH approach shows that central bank interventions and deposit volumes are two factors explaining time-varying exchange rate risk premium. |
| Keywords: | “Forward premium” puzzle, exchange rate risk, time-varying risk premium, affine term structure models, GARCH-in-Mean, foreign and domestic deposits, transition and emerging markets, Armenia. |
| JEL: | E43 E58 F31 G15 O16 P20 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp297&r=upt |