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on Utility Models and Prospect Theory |
| By: | Benno Torgler (QUT); Markus Schaffner (QUT); Bruno S. Frey (University of Zurich); Sascha L. Schmidt (European Business School, Oestrich Winkel, Germany); Uwe Dulleck (QUT) |
| Abstract: | The experimental literature and studies using survey data have established that people care a great deal about their relative economic position and not solely, as standard economic theory assumes, about their absolute economic position. Individuals are concerned about social comparisons. However, behavioral evidence in the field is rare. This paper provides an empirical analysis, testing the model of inequality aversion using two unique panel data sets for basketball and soccer players. We find support that the concept of inequality aversion helps to understand how the relative income situation affects performance in a real competitive environment with real tasks and real incentives. |
| Keywords: | Inequality aversion, relative income, positional concerns, envy, social comparison, performance, interdependent preferences |
| JEL: | D00 D60 L83 |
| Date: | 2008–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2008-25&r=upt |
| By: | Nicholas C. Barberis; Wei Xiong |
| Abstract: | We study the possibility that, aside from standard sources of utility, investors also derive utility from realizing gains and losses on assets that they own. We propose a tractable model of this "realization utility," derive its predictions, and show that it can shed light on a number of puzzling facts. These include the poor trading performance of individual investors, the disposition effect, the greater turnover in rising markets, the effect of historical highs on the propensity to sell, the negative premium to volatility in the cross-section, and the heavy trading of highly valued assets. Underlying some of these applications is one of our model's more novel predictions: that, even if the form of realization utility is linear or concave, investors can be risk-seeking. |
| JEL: | G11 G12 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14440&r=upt |
| By: | Arjen Siegmann |
| Abstract: | We compute minimum funding ratios for Defined Benefit (DB) plans based on the expected utility that can be achieved in a Defined Contribution (DC) pension scheme. Using Monte Carlo simulation, expected utility is computed for three different specifications of utility: power utility, mean-shortfall and mean-downside deviation. Depending on risk aversion and the level of sophistication assumed for the DC-scheme, minimum acceptable funding ratios are between 0.87 and 1.20. If the DC-scheme is constrained to a fixed-contribution setup, minimum funding ratios are between 0.87 and 0.98. Furthermore, the attractiveness of the DB plan increases with the expected equity premium and the fraction invested in stocks. We conclude that the expected value of intergenerational solidarity, implicit in the DB pension fund, can be large. Given a pension fund with a funding ratio of 1.30, a participant in a DC plan has to pay a 2.7 to 6.1%-point higher contribution to achieve equal expected utility. |
| Keywords: | defined-benefit pension fund; individual efficiency; defined-contribution |
| JEL: | E24 E52 J50 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:180&r=upt |
| By: | Voorneveld, Mark (Dept. of Economics, Stockholm School of Economics); Weibull, Jörgen W. (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | In most economics textbooks there is a gap between the non-existence of utility functions and the existence of continuous utility functions, although upper semi-continuity is sufficient for many purposes. Starting from a simple constructive approach for countable domains and combining this with basic measure theory, we obtain necessary and sufficient conditions for the existence of upper semi-continuous utility functions on a wide class of domains. Although links between utility theory and measure theory have been pointed out before, to the best of our knowledge this is the first time that the present route has been taken. |
| Keywords: | preferences; utility theory; measure theory; outer measure |
| JEL: | C60 D01 |
| Date: | 2008–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0704&r=upt |
| By: | Sabrina Teyssier (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | This paper reports on the results of an experiment testing whether the agents selfselect between a competitive payment scheme and a revenue-sharing scheme depending on their inequity aversion. Average efficiency should be increased when these payment schemes are endogenously chosen by agents. We show that the choice of the competition is negatively affected by disadvantageous inequity aversion and risk aversion. In the second half of the experiment, the effect of individual preferences is indirect through the effect of past results. The self-selection of agents increases the efficiency of the competitive scheme but not that of the revenue-sharing scheme, due to a heterogeneity of behaviors. |
| Keywords: | performance pay, incentives, self-selection, inequity aversion, competition, revenue-sharing scheme |
| JEL: | C92 D63 J31 J33 M52 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0821&r=upt |
| By: | Korenok Oleg (Department of Economics, VCU School of Business); Edward L. Millner (Department of Economics, VCU School of Business); Laura Razzolini (Department of Economics, VCU School of Business) |
| Abstract: | We design an experiment to identify the motivation underlying dictators’ behavior. In the typical dictator game, the recipient’s payoff is completely determined by the amount passed. We give an endowment to the recipient as well as the dictator, breaking the equivalence between the amount passed and the recipient’s payoff. The majority of dictators behave as if recipients’ payoffs are normal goods. When we increased recipients’ endowments, dictators decreased the amounts passed. More than half of dictators are averse to inequality. They passed nothing when endowments were equalized. We conclude that in the standard dictator game most dictators pass because the recipients are given no endowments and inequality is at its maximum. |
| Keywords: | Other-regarding utility, dictator game |
| JEL: | C91 D63 D64 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:vcu:wpaper:0807&r=upt |
| By: | Francis X. Diebold (Department of Economics, University of Pennsylvania); Georg H. Strasser (Department of Economics, Boston College) |
| Abstract: | We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed crosscorrelation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods. |
| Keywords: | Realized volatility, Market microstructure theory, High-frequency data, Financial econometrics |
| JEL: | G14 G20 D82 D83 C51 |
| Date: | 2008–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-038&r=upt |
| By: | Jose M. Merigo Lindahl; Anna M. Gil Lafuente (Universitat de Barcelona) |
| Abstract: | The index of maximum and minimum level is a very useful technique, especially for decision making, which uses the Hamming distance and the adequacy coefficient in the same problem. In this paper, we suggest a generalization by using generalized and quasi-arithmetic means. As a result, we will get the generalized ordered weighted averaging index of maximum and minimum level (GOWAIMAM) and the Quasi-OWAIMAAM operator. These new aggregation operators generalize a wide range of particular cases such as the generalized index of maximum and minimum level (GIMAM), the OWAIMAM, the ordered weighted quadratic averaging IMAM (OWQAIMAM), and others. We also develop an application of the new approach in a decision making problem about selection of products. |
| Keywords: | generalized mean, index of maximum and minimum level, quasi-arithmetic mean, decision making, owa operator |
| JEL: | C44 D89 C49 D81 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2008203&r=upt |