|
on Utility Models and Prospect Theory |
| By: | Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | The calibration theorem by Rabin (2000) implies that seemingly plausible smallstake choices under risk imply implausible large-stake risk aversion. This theorem is derived based on the expected utility of wealth model. However, Cox and Sadiraj (2006) show that such implications do not follow from the expected utility of income model. One may then wonder about the implications for more applied consumption analysis. The present paper therefore expresses utility as a function of consumption in a standard life cycle model, and illustrates the implications of this model with experimental small- and intermediate-stake risk data from Holt and Laury (2002). The results suggest implausible risk aversion parameters as well as unreasonable implications for long term risky choices. Thus, the conventional intertemporal consumption model under risk appears to be inconsistent with the data.<p> |
| Keywords: | Expected utility of income; expected utility of final wealth; dynamic consumption theory; asset integration; time inconsistency; narrow bracketing |
| JEL: | D81 D91 |
| Date: | 2009–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0351&r=upt |
| By: | Marielle Brunette; Laure Cabantous (Nottingham University Business School); Stéphane Couture (Laboratoire d'Economie Forestière, INRA - AgroParisTech); Anne Stenger (Laboratoire d'Economie Forestière, INRA - AgroParisTech) |
| Abstract: | This article presents the results of an experiment designed to test theoretical predictions about the impact of public compensation schemes and ambiguity on insurance and self-insurance decisions. Consistent with theory, we find that government assistance significantly reduces willingness to pay (WTP) for insurance and self-insurance (compared with a free insurance market). As expected, we also find significant differences between WTPs for insurance under different types of government compensation programs. For example, results from our experiment confirm the prediction that the WTP for insurance is smaller under a “Fixed Help” program than under a “Contingent Fixed Help” program where the government assistance is conditioned to the purchase of an insurance policy. Thirdly, we find that ambiguity, i.e., uncertainty about probability, significantly increases WTPs for insurance. This result, which indicates that decision-makers are ambiguity averse, is in line with previous results on the impact of ambiguity on insurance demand for low probability risks. Lastly, our experiment provides a clear support for the hypothesis that attitude to risk and attitude to ambiguity are two independent phenomena. In fact in this experiment, decision-makers are both risk-seekers (i.e., the mean WTP for insurance is on average smaller than the expected value of the loss) and ambiguity averse (i.e., the mean WTP for insurance is on average higher for an ambiguous risk than for a ’risky’ risk). |
| Keywords: | Experimental Economics, Insurance, Self-Insurance, Public Policy, Forest, Ambiguity, Risk |
| JEL: | C91 D81 Q23 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:lef:wpaper:2008-05&r=upt |
| By: | Dietrich Franz; List Christian (METEOR) |
| Abstract: | According to standard rational choice theory, as commonly used in political science and economics, an agent''s fundamental preferences are exogenously fixed, and any preference change over decision options is due to Bayesian information learning. Although elegant and parsimonious, this model fails to account for preference change driven by experiences or psychological changes distinct from information learning. We develop a model of non-informational preference change.Alternatives are modelled as points in some multidimensional space, only some of whose dimensions play a role in shaping the agent''s preferences.Any change in these `motivationally salient'' dimensions can change the agent''s preferences. How it does so is described by a new representation theorem. Our model not only captures a wide range of frequently observed phenomena, but also generalizes some standard representations of preferences in political science and economics. |
| Keywords: | mathematical economics; |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2009017&r=upt |
| By: | Abigail Barr; Chris Wallace; Jean Ensminger; Joseph Henrich; Clark Barrett; Alexander Bolyanatz; Juan Camilo Cardenas; Michael Gurven; Edwins Gwako; Carolyn Lesorogol; Frank Marlowe; Richard McElreath; David Tracer; John Ziker |
| Abstract: | Data from three bargaining games - the Dictator Game, the Ultimatum Game, and the Third-Party Punishment Game - played in 15 societies are presented. The societies range from US undergraduates to Amazonian, Arctic, and African hunter-gatherers. Behaviour within the games varies markedly across societies. The paper investigates whether this behavioural diversity can be explained solely by variations in inequality aversion. Combining a single parameter utility function with the notion of subgame perfection generates a number of testable predictions. While most of these are supported, there are some telling divergencies between theory and data: uncertainty and preferences relating to acts of vengeance may have influenced play in the Ultimatum and Third-Party Punishment Games; and a few subjects used the games as an opportunity to engage in costly signalling. |
| Keywords: | Bargaining games, Cross-cultural experiments, Inequality aversion |
| JEL: | C72 C9 Z13 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:422&r=upt |
| By: | Jean-Paul Carvalho |
| Abstract: | There has been a dramatic surge in Islamic participation and values since the 1970s. We propose a theory of the contemporary Islamic revival based upon two forms of relative deprivation - envy and unfulfilled aspirations. To analyze these motivations, a behavioral model of religion is developed in which agents have reference-dependent preferences. We demonstrate that raised aspirations, low social mobility, high income inequality and poverty are intimately related, not separate causes of a religious revival. As such, the origins of the Islamic revival are traced to a combination of two developments: (1) a growth reversal which raised aspirations and led subsequently to a decline in social mobility which left aspirations unfulfilled among the educated middle class, (2) increasing income inequality impoverishment of the lower-middle class. The sexual revolution in the West and rapid urbanization in Muslim societies intensified this process of religious revival. |
| Keywords: | Islamic revival, Economics of religion, Endogenous preferences, Reference-dependent preferences, Inequality, Relative deprivation |
| JEL: | Z12 J22 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:424&r=upt |
| By: | Vazquez, Samuel E.; Severini, Simone |
| Abstract: | We develop a formalism to study linearized perturbations around the equilibria of a pure exchange economy. With the use of mean field theory techniques, we derive equations for the flow of products in an economy driven by heterogeneous preferences and probabilistic interaction between agents. We are able to show that if the economic agents have static preferences, which are also homogeneous in any of the steady states, the final wealth distribution is independent of the dynamics of the non-equilibrium theory. In particular, it is completely determined in terms of the initial conditions, and it is independent of the probability, and the network of interaction between agents. We show that the main effect of the network is to determine the relaxation time via the usual eigenvalue gap as in random walks on graphs. |
| Keywords: | non-equilibrium economics; perturbation theory |
| JEL: | D5 D51 C62 |
| Date: | 2009–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14569&r=upt |