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on Utility Models and Prospect Theory |
| By: | Dominiak, Adam; Schnedler, Wendelin |
| Abstract: | Individuals exhibit a randomization preference if they prefer random mixtures of two bets to each of the involved bets. Such preferences provide the foundation of various models of uncertainty aversion. However, it has to our knowledge not been empirically investigated whether uncertainty-averse decision makers indeed exhibit such preferences. Here, we examine the relationship experimentally. We find that uncertainty aversion is not positively associated with randomization preferences. Moreover, we observe choices that are not consistent with the prevailing theories of uncertainty aversion: a non-negligible number of uncertain-averse subjects seem to dislike randomization. |
| Keywords: | uncertainty aversion; randomization preference; ambiguity; Choquet expected utility model; maxmin expected utility model; experiment |
| Date: | 2010–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0494&r=upt |
| By: | Kerschbamer, Rudolf (University of Innsbruck); Sutter, Matthias (University of Innsbruck); Dulleck, Uwe (Queensland University of Technology) |
| 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:iza:izadps:dp4647&r=upt |
| By: | Alain Chateauneuf (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Caroline Ventura (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | The aim of this paper is two-fold : first, to emphasize that the seminal result of Dow and Werlang [7] remains valid under weaker conditions, and this even if non-positive prices are considered, or equally that the no-trade interval result is robust when considering assets which can yield non-positive outcomes. Second, to make precise the weak uncertainty aversion behavior characteristic of the existence of such and interval. |
| Keywords: | Choquet expected utility, no-trade interval, perfect hedging, comonotone diversification, capacity. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00442861_v1&r=upt |
| By: | Thibault Gajdos (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CERSES - Centre de recherche sens, ethique, société - CNRS : UMR8137 - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Jean-Christophe Vergnaud (CERSES - Centre de recherche sens, ethique, société - CNRS : UMR8137 - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | The most usual procedure when facing decisions in complex settings consists in consulting experts, aggregating the information they provide, and deciding on the basis of this aggregated information. We argue that such a procedure entails a substantial loss, insofar as it precludes the possibility to take into account simultaneously the decision maker's attitude towards conflict among experts and her attitude towards imprecision of information. We propose to consider directly how a decision maker behaves when using information coming from several sources. We give an axiomatic foundation for a decision criterion that allows to distinguish on a behavioral basis the decision maker's attitude towards imprecision and towards conflict. |
| Keywords: | Decisions with multiple sources of information. Conflict aversion. Imprecision aversion. |
| Date: | 2009–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00443075_v1&r=upt |
| By: | Keita Owari |
| Abstract: | This paper addresses the applicability of the convex duality method for utility maximization, in the presence of random endowment. When the price process is a locally bounded semimartingale, we show that the fundamental duality relation holds true, for a wide class of utility functions and unbounded random endowments. We show this duality by exploiting Rockafellar's theorem on integral functionals, to a random utility function. |
| Keywords: | Utility maximization, Convex duality method, Martingale measures |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd09-091&r=upt |
| By: | Francisco Mart’nez-Mora (University of Leicester); M. Socorro Puy (Department of Economic Theory, Universidad de M‡laga) |
| Abstract: | In this paper, we analyze the political consequences derived from policy preferences which are non-symmetric around the peak. While the assumption of symmetric preferences is innocuous in political equi- libria with platforms convergence, it is not neutral when candidates are differentiated. Following the citizen-candidate approach, we show that a larger government size emerges when preferences of the me- dian voter off-the-peak are more intense towards overprovision (what we call wasteful preferences), whereas a smaller government results when her preferences are more intense towards underprovision (what we call scrooge preferences). We next study the determinants of the shape of preferences off-the-peak and find that: (i) A positive sign of the third derivative of the policy-induced utility function indicates wasteful preferences, while a negative sign indicates scrooge prefer- ences. (ii) The analog of KimballÕs coefficient of prudence (which is closely related to Arrow-PrattÕs coefficient of risk aversion), can be used to measure degrees of wastefulness and scroogeness. (iii) Sym- metric preferences require imposing quite stringent restrictions on the policy problem. Numerical examples illustrate the discrepancies de- rived from symmetric preferences versus scrooge preferences in terms of equilibrium predictions. |
| Keywords: | Single-peaked preferences, citizen-candidate, coefficient of prudence, differentiated platforms, risk-aversion |
| JEL: | D72 H31 H5 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mal:wpaper:2009-9&r=upt |
| By: | Anna Conte (Strategic Interaction Group, Max-Planck Institute of Economics, Jena); Peter G. Moffatt (School of Economics, University of East Anglia); Fabrizio Botti (University of Rome I "La Sapienza"); Daniela T. Di Cagno (LUISS Guido Carli); Carlo D'Ippoliti (University of Rome "La Sapienza") |
| Abstract: | Data on contestants' choices in Italian Game Show Affari Tuoi are analysed in a way that separates the effect of risk attitude (preferences) from that of beliefs concerning the amount of money that will be offered to contestants in future rounds. The most important issue addressed in the paper is what belief function is actually being used by contestants. The parameters of this function are estimated freely along with the parameters of a choice model. Separate identification of the belief function and preferences is possible by virtue of the fact that at a certain stage of the game, beliefs are not relevant, and risk attitude is the sole determinant of choice. The rational expectations hypothesis is tested by comparing the estimated belief function with the "true" offer function which is estimated using data on offers actually made to contestants. We find that there is a significant difference between these two functions, and hence we reject the rational expectations hypothesis. However, when a simpler "rule-of-thumb" structure is as- sumed for the belief function, we find a correspondence to the function obtained from data on actual offers. Our overall conclusion is that contestants are rational to the extent that they make use of all available relevant information, but are not fully rational because they are not processing the information in an optimal way. The importance of belief-formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward-looking as opposed to myopic. |
| Keywords: | Beliefs, Discrete choice models, Method of simulated likelihood, Natural Experiments, rational expectations, risky choice |
| JEL: | C15 C23 C25 D81 |
| Date: | 2009–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-104&r=upt |
| By: | Antoine Nebout; Dimitri Dubois |
| Abstract: | We report experimental findings about subjects’ behavior in dynamic decision problems involving multistage lotteries with different timings of resolution of uncertainty. Our within subject design allows us to study violations of the independence axiom in the light of the dynamic axioms' ones : dynamic consistency, consequentialism and reduction of compound lotteries. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:09-30&r=upt |
| By: | Raphaël Giraud (CRESE - Université de Franche Comté); Jean-Marc Tallon (Centre d'Economie de la Sorbonne - Paris School of Economics) |
| Abstract: | We argue, in the spirit of some of Jean-Yves Jaffray's work, that explicitly incorporating the information, however imprecise, available to the decision marker is relevant, feasible and fruitful. In particular, we show that it can lead us to know whether the decision maker has wrong beliefs and whether it matters or not, that it makes it possible to better model and analyze how the decision maker takes into account new information, even when this information is not an event and finally that it is crucial when attempting to identify and measure the decision maker's attitude toward imprecise information. |
| Keywords: | Beliefs, imprecision, information. |
| JEL: | B41 D80 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:09086&r=upt |