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on Utility Models and Prospect Theory |
| By: | JOSE MARIA ABELLAN-PERPIÑAN (Departmento de Economia Aplicada, Universidad de Murcia); Han Bleichrodt (Department of Economics & iMTA/iBMG, Erasmus University); Jose Luis Pinto-Prades (Departament of Economics, Universidad Pablo de Olavide) |
| Abstract: | This paper tests the consistency of health utility measurements with individual preferences. We compare three methods, the time trade-off, the standard gamble and a version of the standard gamble that corrects for the deviations from expected utility modeled by prospect theory. Individual preferences are measured both through a ranking task and through a choice task. In decisions involving no risk the time trade-off is most consistent with people’s preferences with the standard gamble a close second. In decisions involving risk the corrected standard gamble is most consistent with people’s preferences. Our data do not support the common assumption in health economics that utility is transferable across decision contexts. |
| Keywords: | Health utility measurement, QALYs, standard gamble, time trade-off, prospect theory. |
| JEL: | I10 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:07.17&r=upt |
| By: | Ottone, Stefania; Ponzano, Ferruccio |
| Abstract: | The model by Fehr and Schmidt introduces envy and altruism in the utility function of a representative agent. The aim of this paper is to provide two extensions – non linearity and non self-centredness – to this model. This extension turns out to be more consistent with experimental evidence than the original model. |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:uca:ucapdv:91&r=upt |
| By: | A. V. Muthukrishnan (Hong Kong University of Science and Technology); Luc Wathieu (ESMT European School of Management and Technology) |
| Abstract: | This paper investigates situations where a sizeable sub-set of consumers prefer an inferior (dominated) offer made by an established brand to a superior (dominating) offer made by a less-established brand. Established brands are those for which consumers hold more confident beliefs concerning overall quality. Through a series of eight experiments, we test the hypothesis that the preference for a dominated established brand is linked to ambiguity aversion, a seemingly unrelated pattern of choice behavior between monetary gambles. We first show a correlation between ambiguity aversion and the preference for dominated established brands. We then demonstrate that the preference for established brands is enhanced when ambiguity aversion is made more salient in unrelated preceding choices. To further study the ambiguity-reducing properties of established brands, the last experiments assign brand names to monetary gambles, and it appears that (a priori unrelated) established brand names increase the likelihood of choosing ambiguous gambles. Overall, this research argues that brand equity for longstanding brands derives (at least in part) from consumers’ tendency to avoid ambiguity. |
| Keywords: | branding, brand choice, consumer behavior, decision making under uncertainty |
| JEL: | C91 D10 D80 M31 |
| Date: | 2007–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-07-005&r=upt |
| By: | Astrid Matthey (Max-Planck-Institute of Economics Jena, Germany); Nadja Dwenger (DIW Berlin, Germany) |
| Abstract: | The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We ?rst develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on the factor found to be crucial: the adjustment of reference states to changes in expectations. The results suggest that the costs of high aspirations can be signi?cant, since reference states do not adjust quickly. We use a novel, indirect approach that allows us to infer the determinants of the reference state from observed behavior, rather than to rely on cheap talk. |
| Keywords: | aspirations, reference state, expectations, individual utility, experiments |
| JEL: | D11 D84 C91 |
| Date: | 2007–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2007-097&r=upt |
| By: | David, Cesarini (Department of Economics, Massachusetts Institute of Technology); Dawes, Christopher T. (Political Science Department, University of California, San Diego); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Lichtenstein, Paul (Department of Medical Epidemiology and Biostatistics, Karolinska Institutet); Wallace, Björn (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | We use the classical twin design to provide estimates of genetic and environmental influences on experimentally elicited preferences for risk and altruism. Our estimates provide strong prima facie evidence that economic preferences are heritable. Approximately 30 percent of the variation in behavior is explained by genetic effects in the best-fitting models. The results suggest a modest role for common environment as a source of phenotypic variation. Based on the findings, we encourage economists to move beyond a black-box treatment of preference formation and suggest that the further study of the codetermination of preferences by genes and environment will lead to a more comprehensive economic science. |
| Keywords: | Genetics; Altruism; Risk Aversion; Preferences; Experiments |
| JEL: | C90 D01 D64 |
| Date: | 2007–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0679&r=upt |
| By: | Magni, Carlo Alberto |
| Abstract: | The Net Present Value maximizing model shows fallacies and inconsistencies that may be easily unmasked by performing a cognitive analysis of the decision-making process implied by the maximization problem. The model may be conveniently rescued if the maximizing version of the criterion is shunt aside and a boundedly rational interpretation is given. The resulting ‘mixed strategy’, currently in use by many real-life decision makers, opens up terrain to a fruitful cooperation between bounded and unbounded rationality. This paper is consistent with a fluid and nondichotomous interpretation of dual-process theories. |
| Keywords: | Finance; Investment decisions; Net Present Value; heuristics; bounded rationality; cognition. |
| JEL: | D81 G11 B40 G31 A12 M20 G30 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6073&r=upt |
| By: | Alexander K. Koch (Department of Economics, Royal Holloway, University of London); Hui-Fai Shing (Department of Economics, Royal Holloway, University of London) |
| Abstract: | A widely documented empirical regularity in gambling markets is that bets on high probability events (a race won by a ``favourite'') have higer expected returns than bets on low probability events (a ``longshot'' win). Such favourite-longshot (FL) biases however appear to be more severe and persistent in bookmaker markets than in pari-mutuel markets; the latter sometims exhibit no bias or a revers FL bias. Our results help understand these differences: the odds grid in bookmaker markets leads to a built-in FL bias, wheras that used in pari-mutuel betting pushes these markets toward a reverse FL bias. |
| Keywords: | Gambling; Favourite-Lonshot Bias; Bookmaker betting; Parimutuel Betting; Breakage, Tick Size. |
| JEL: | G13 L13 L83 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:hol:holodi:0704&r=upt |