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on Utility Models and Prospect Theory |
| By: | Jacob Gyntelberg (Bank for International Settlements); Frank Hansen (Department of Economics, University of Copenhagen) |
| Abstract: | We model the notion of a "small world" as a context dependent state space embedded into the "grand world". For each situation the decision maker creates a "small world" reflecting the events perceived to be relevant for the act under consideration. The "grand world" is represented by an event space which is a more general construction than a state space. We retain preference axioms similar in spirit to the Savage axioms and obtain, without abandoning linearity of expectations, a subjective expected utility theory which allows for an intuitive distinction between risk and uncertainty. We also obtain separation of subjective probability and utility as in the state space models. |
| Keywords: | subjective expected utility; decision making under uncertainty; uncertainty aversion; Ellsberg paradox |
| JEL: | D8 G12 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0926&r=upt |
| By: | Sabrina Teyssier |
| Abstract: | This paper analyzes which type of intrinsic preferences drive an agent’s behavior in a sequential public good game depending on whether the agent is first or second mover. Theoretical predictions are based on heterogeneity of individuals in terms of social and risk preferences. We modelize preferences according to the inequity aversion model of Fehr and Schmidt (1999) and to the assumption of constant relative risk aversion. Risk aversion is significantly and negatively correlated with the contribution decision of first movers. Second movers with sufficiently high advantageous inequity aversion free-ride less and reciprocate more than others. Both results are predicted by our model. Nevertheless, no effect of disadvantageous inequity aversion of first movers is found in the data while theory predicted it. Our results underline the importance of taking into account the order of agents’ play to correctly understand which type of preferences influences cooperation in voluntary contribution mechanisms. They suggest that individuals’ behavior can be consistent between different experimental games. |
| Keywords: | inequity aversion, risk aversion, public good game, conditional contribution |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0047&r=upt |
| By: | Giuseppe Attanasi; Luca CORAZZINI; Nikolaos GEORGANTZIS; Francesco PASSARELLI |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ler:wpaper:09.26.302&r=upt |
| By: | Lovo, Stefno; Bisière, Christophe; Décamps, Jean-Paul |
| Abstract: | In this paper, the authors conduct a series of experiments that simulate trading in financial markets and which allows them to identify the different effects that subjects’ risk attitudes and belief updating rules have on the information content of the order flow. They find that there are very few risk-neutral subjects and that subjects displaying risk aversion or risk-loving tend to ignore private information when their prior beliefs on the asset fundamentals are strong. Consequently, private information struggles penetrating trading prices. The authors find evidence of non-Bayesian belief updating (confirmation bias and under-confidence). This reduces (improves) market efficiency when subjects’ prior beliefs are weak (strong). |
| Keywords: | risk attitude; financial market; information; belief; risk-neutral information |
| JEL: | F16 F17 F18 |
| Date: | 2009–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0917&r=upt |
| By: | Hill, Brian |
| Abstract: | Indeterminate preferences have long been a tricky subject for choice theory. One reason for which preferences may be less than fully determinate is the lack of confidence in one’s preferences. In this paper, a representation of confidence in preferences is proposed. It is used to develop an account of the role which confidence which rests on the following intuition: the more important the decision to be taken, the more confidence is required in the preferences needed to take it. An axiomatisation of this choice rule is proposed. This theory provides a natural account of when an agent should defer a decision; namely, when the importance of the decision exceeds his confidence in the relevant preferences. Possible applications of the notion of confidence in preferences to social choice are briefly explored. |
| Keywords: | Incomplete preference; Revealed preference; Confidence in preferences; Deferral of decisions; Importance of decisions; Social choice |
| JEL: | D01 D71 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0919&r=upt |
| By: | Christian Wolff (Luxembourg School of Finance, University of Luxembourg); Thorsten Lehnert (Luxembourg School of Finance, University of Luxembourg); Cokki Versluis (DSM Corporate Technology) |
| Abstract: | It is a well known empirical fact that actual option prices show persistent and systematic deviations from Black-Scholes option values. While a substantial number of enhancements have been proposed in the literature, these approaches typically leave investors’ preferences towards risk unmodified. In this paper we study option prices in an economy where investors are valuing call options according to the cumulative prospect theory of Kahneman and Tversky. We distinguish two prospect option pricing models, based on whether cash flows are either considered to be segregated or aggregated over time. These models are compared with the Black-Scholes model and the stochastic volatility model of Heston. Empirical analysis of European call options on the S&P 500 index shows that prospect option pricing models significantly improve the fitting performance compared with the Black-Scholes model and that especially the aggregated version’s performance is at least equivalent to the Heston model. |
| Keywords: | Prospect Theory, Framing, Mental Accounting, Risk Attitude, Loss Aversion, Probability Perception, Weighting Function, Stochastic Volatility, Option Pricing. |
| JEL: | D01 G11 G12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:09-03&r=upt |
| By: | Rudolf Kerschbamer; Matthias Sutter; Uwe Dulleck |
| Abstract: | Credence goods markets suffer from inefficiencies arising from informational asymmetries between expert sellers and customers. While standard theory predicts that inefficiencies disappear if customers can verify the quality received, verifiability fails to yield efficiency in experiments with endogenous prices. We identify heterogeneous distributional preferences as the main cause and design a parsimonious experiment with exogenous prices that allows classifying experts as either selfish, efficiency loving, inequality averse, inequality loving or competitive. Results show that most subjects exhibit non-standard distributional preferences, among which efficiency-loving and inequality aversion are most frequent. We discuss implications for institutional design and agent selection in credence goods markets. |
| Keywords: | Distributional Preferences, Credence Goods, Verifiability, Experiment |
| JEL: | C72 C91 D82 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2009-28&r=upt |
| By: | Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We discuss the design of stated preference (SP) surveys in light of findings in behavioral economics such as context dependence of preferences, learning, and differences between revealed and normative preferences. More specifically, we discuss four different areas: (i) revealed and normative preferences, (ii) learning and constructed preferences, (iii) context dependence, and (iv) hypothetical bias. We argue that SP methods would benefit from adapting to some of the findings in behavioral economics, but also that behavioral economics may gain insights from studying SP methods.<p> |
| Keywords: | stated preferences; behavioral economics |
| JEL: | C91 H40 Q51 |
| Date: | 2009–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0418&r=upt |