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on Utility Models and Prospect Theory |
| By: | Moez Abouda (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, BESTMOD - Institut Supérieur de Gestion de Tunis) |
| Abstract: | La Vallée (1968), in the expected utility model, gives a sufficient condition for positivity of the bid-selling spread. In this article, we show that this sufficient condition, namely decreasing absolute risk aversion (DARA) is in fact necessary. Moreover, we prove that the expected utility hypothesis and differentiability of the utility function are not required. |
| Keywords: | DARA, NARA, bid-selling spread, perfect hedging, risk premium. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00270648_v1&r=upt |
| By: | Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I); Jean-Louis Rullière (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Isabelle Vialle (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | Monitoring is typically included in economic models of crime thanks to a probability of detection, constant across individuals. We build on recent results in psychology to argue that comparative optimism deeply affects this standard relation. To this matter, we introduce an experiment involving proper incentives that allow a measurement of optimism bias. Our experiments support the relevance of so-called comparative optimism in decision under risk. In the context of illegal activities, our results provide a guide into costless devices to undermine fraud, through well-designed information campaigns. |
| Keywords: | Optimism; Risk aversion; Monitoring design; Illegal activity; Experimental economics |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00272928_v1&r=upt |
| By: | Benno Torgler; Sascha L. Schmidt; Bruno S. Frey |
| Abstract: | People care a great deal about their relative economic position and not solely about their absolute economic position. However, behavioral evidence is rare. This paper provides evidence on how the relative income position affects professional sports performances. Our analysis suggests that if a player’s salary is below the average and this difference increases, his performance worsens. Moreover, the larger the income differences, the stronger positional concern effects are observable. We also find that the more the players are integrated, the more evident a relative income effect is. Finally, we find that positional effects are stronger among high performing teams. |
| Keywords: | Relative income; positional concerns; organizational justice; envy; social comparison; relative derivation; equity theory; prospect theory; loss aversion; performance |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2008-07&r=upt |
| By: | Ehud Guttel |
| Abstract: | Under the conventional tort law paradigm, a tortfeasor behaves unreasonably when two conditions are met: the tortfeasor could have averted the harm by investing in cost-effective precautions and failed to do so, and other, more cost-effective precautions were not available to the victim. Torts scholarship has long argued that making such a tortfeasor responsible for the ensuing harm induces optimal care. This Article shows that by applying the conventional analysis, courts create incentives for opportunistic investments in prevention. In order to shift liability to others, parties might deliberately invest in precautions even where such investments are inefficient. The Article presents two possible solutions to the problem. By instituting a combination of (1) broader restitution rules and (2) an extended risk-utility standard, legislators and judges can reform tort law to discourage opportunistic precautions and maximize social welfare. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp471&r=upt |
| By: | Sumon K. Bhaumik (Brunel University); Ira N. Gang (Rutgers University); Myeong-Su Yun (Tulane University) |
| Abstract: | Despite a significant expansion of the literature on conflicts and fragility of states, only a few systematic attempts have been made to link the theoretical literature on social conflicts to the available micro-level information about the people who are involved in these conflicts. We address this lacuna in the literature using a household-level data set from Kosovo. Our analysis suggests that it is individually rational for competing ethnic communities, Kosovo Albanians and Kosovo Serbs, to resist a quick agreement on a social contract to share the region’s resources. |
| Keywords: | conflict, individual rationality, economic deprivation, Balkans, Kosovo |
| JEL: | J15 O12 I32 |
| Date: | 2008–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200710&r=upt |
| By: | Georges Prat; Remzi Uctum |
| Abstract: | Using financial experts’ Yen/USD exchange rate expectations provided by Consensus Forecasts surveys (London), this paper aims to model the 3 and 12-month ahead ex-ante risk premia measured as the difference between the expected and forward exchange rates. According to a two-country portfolio asset pricing model, the risk premium is modeled as the product of three factors: a constant risk aversion coefficient, the expected variance of the rate of change in the real exchange rate, and the spread between domestic agent’s market position in foreign assets and foreign agent’s market position in domestic assets (net market position). When the returns are partially predictable, the expected variance is horizondependent and this is a sufficient condition for agents not to require at any time a unique risk premium for all maturities but a set of premia scaled by the time horizon of the investment. For each horizon the expected variance is assumed to depend on the historical values of the variance and on the unobservable maturity-dependent net market positions which have been estimated through a state space model using the Kalman filter methodology. We find that the model explains satisfactorily both the common and the non-random specific time-patterns of the 3- and 12-month ex-ante premia. |
| Keywords: | risk premium, foreign exchange market, international asset pricing model |
| JEL: | D84 E44 G14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2008-2&r=upt |
| By: | Itai Arieli |
| Abstract: | R. J. Aumann and J. H. Drèze (2008) define a rational expectation of a player i in a game G as the expected payo of some type of i in some belief system for G in which common knowledge of rationality and common priors obtain. Our goal is to characterize the set of rational expectations in terms of the game's payoff matrix. We provide such a characterization for a specific class of strategic games, called semi-elementary, which includes Myerson's "elementary" games. |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:huj:dispap:dp475&r=upt |