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on Utility Models and Prospect Theory |
| By: | Pavlo R. Blavatskyy |
| Abstract: | Risk aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of risk aversion to a more general setup where outcomes (consequences) may not be measurable in monetary terms and people may have fuzzy preferences over lotteries, i.e. they may choose in a probabilistic manner. The paper considers comparative risk aversion within neoclassical expected utility theory, a constant error/tremble model and a strong utility model of probabilistic choice (which includes the Fechner model and the Luce choice model as special cases). The paper also provides a new definition of relative riskiness of lotteries. |
| Keywords: | Risk aversion, more risk averse than, riskiness, probabilistic choice,expected utility theory, Fechner model, Luce choice model |
| JEL: | D00 D80 D81 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:370&r=upt |
| By: | Ronald J. Baker II (Millersville University of Pennsylvania); Susan K. Laury (Georgia State University); Arlington W. Williams (Indiana University Bloomington) |
| Abstract: | Lottery-choice experiments are conducted to compare risk preferences revealed by three-person groups versus isolated individuals. A lottery-choice experiment consists of a menu of paired lottery choices structured so that the crossover point from a low-risk to a high-risk lottery can be used to infer the degree of risk aversion. A between-subjects experiment of group versus individual lottery-choice decisions reveal that there is not a significant difference in the average crossover point, but lottery choices are affected by a significant interaction between subject composition (individual or group) and lottery winning percentage. Also, a three-phased individual-group-individual sequenced experiment reveals that the count of safe lotteries chosen by groups is, on average, significantly greater than the mean of the individual members. Finally, making a phase-two group decision has a significant impact on subsequent phase-three individual decisions relative to the initial phase-one (individual) decisions. |
| Keywords: | lab experiments, risk preferences, group decisions |
| JEL: | C91 C92 D80 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:20070181_updated&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 |
| JEL: | D00 D60 L83 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:368&r=upt |
| By: | Giovanni Cespa (Queen Mary, University of London, CSEF-Università di Salerno, and CEPR); Thierry Foucault (HEC, Paris, GREGHEC, and CEPR) |
| Abstract: | We consider a multi-period rational expectations model in which risk-averse investors differ in their information on past transaction prices (the ticker). Some investors (insiders) observe prices in real-time whereas other investors (outsiders) observe prices with a delay. As prices are informative about the asset payoff, insiders get a strictly larger expected utility than outsiders. Yet, information acquisition by one investor exerts a negative externality on other investors. Thus, investors' average welfare is maximal when access to price information is rationed. We show that a market for price information can implement the fraction of insiders that maximizes investors' average welfare. This market features a high price to curb excessive acquisition of ticker information.We also show that informational efficiency is greater when the dissemination of ticker information is broader and more timely. |
| Keywords: | Market data sales, Latency, Transparency, Price discovery, Hirshleifer effect |
| JEL: | G10 G12 G14 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp628&r=upt |
| By: | Sadowski, Philipp |
| Abstract: | Following Kreps (1979), we consider a decision maker with uncertain beliefs about her own future taste. This uncertainty leaves the decision maker with preference for flexibility: When choosing among menus containing alternatives for future choice, she weakly prefers larger menus. Existing representations accommodating this choice pattern cannot distinguish tastes (indexed by a subjective state space) and beliefs (a probability measure over the subjective states) as different concepts, making it impossible to relate parameters of the representation to choice behavior. We allow choice among menus to depend on exogenous states, interpreted as information. Our axioms yield a representation that uniquely identifies beliefs, provided the impact of information on choice is rich. The result is suggested as a choice theoretic foundation for the assumption, commonly made in the incomplete contracting literature, that contracting parties, who know each other's ranking of contracts, also share beliefs about each others future tastes in the face of unforeseen contingencies. |
| Keywords: | Preference for Flexibility; Uniqueness; Contracts; Subjective Uncertainty |
| JEL: | D86 D84 D81 D82 D83 D80 D01 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8614&r=upt |
| By: | Ludovic Renou |
| Abstract: | This paper introduces a new solution concept, a minimax regret equilibrium, which allows for the possibility that players are uncertain about the rationality and conjectures of their opponents. We provide several applications of our concept. In particular, we consider pricesetting environments and show that optimal pricing policy follows a non-degenerate distribution. The induced price dispersion is consistent with experimental and empirical observations (Baye and Morgan (2004)). |
| Keywords: | Minimax regret, rationality, conjectures, price dispersion, auction |
| JEL: | C7 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1087&r=upt |