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on Utility Models and Prospect Theory |
| By: | Marco Casari (University of Bologna); Davide Dragone (University of Bologna) |
| Abstract: | We study time preferences in a real-effort experiment with a one-month horizon. We report that two thirds of choices suggest negative time preferences. Moreover, choice reversal over time is common even if temptation plays no role. We propose and measure three distinct concepts of choice reversal over time to study time consistency. This evidence calls for an important role for anticipatory feelings and uncertainty in intertemporal behavior. |
| Keywords: | negative time preferences, choice reversal, risk, time inconsistency, real-effort experiment |
| JEL: | C91 D01 D80 D90 |
| Date: | 2010–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-087&r=upt |
| By: | Breitmoser, Yves; Tan, Jonathan H.W. |
| Abstract: | Are "generous" bargaining offers made out of fairness or in fear of rejection? We disentangle risk and social references by analyzing experimental behavior in three majority bargaining games: (1) a random-proposer game with infinite time horizon; 2) a one round proposer game with disagreement payoffs equal to the infinite horizon continuation payoffs; and, (3) a demand commitment game. Inequity aversion predicts very differently across these games, but risk aversion does not. Observed strategies violate neither stationarity nor truncation consistency. This allows us to use structural models of bargaining behavior to estimate the latent type shares of subjects with CES, inequity averse, and Prospect theoretic preferences. The Prospect theoretic, i.e. reference-dependent, model of utility explains the observations far better than any mixture of alternative models. |
| Keywords: | coalitional bargaining; non-cooperative modeling; random utility model; quantal response equilibrium; laboratory experiment |
| JEL: | C78 D78 C72 |
| Date: | 2010–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:27444&r=upt |
| By: | Jingyuan Li; Georges Dionne |
| Abstract: | We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker dependence condition than first-degree expectation dependence to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order representative agents, and are linked to the equity premium puzzle. |
| Keywords: | Consumption-based CAPM, Risk premium, Equity premium puzzle |
| JEL: | D51 D80 G12 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1047&r=upt |
| By: | Edoardo GAFFEO; Ivan PETRELLA; Damjan PFAJFAR; Emiliano SANTORO |
| Abstract: | This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger effects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically different across different cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households. utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing effects on the responses of output and inflation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-o¤ between inflation and output stabilization that naturally arises in this context. Greater elasticity of inflation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of inflation under discretion, compared to what is otherwise prescribed during contractions. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces10.28&r=upt |
| By: | Natalia Lukomska (Institute of Evolutionary Biology and Environmental Studies, University of Zurich, Switzerland); Martin F. Quaas (Department of Economics, University of Kiel, Germany); Stefan Baumgärtner (Department of Sustainability Sciences and Department of Economics, Leuphana University of Lüneburg, Germany) |
| Abstract: | We study the role of bush encroachment control for a farmer’s income and income risk in a stochastic ecological-economic model of grazing management in semiarid rangelands. In particular, we study debushing as an instrument of risk management that complements the choice of an adaptive grazing management strategy for that sake. We show that debushing, while being a good practice for increasing the mean pasture productivity and thus expected income, also increases the farmer’s income risk. The optimal extent of debushing for a risk-averse farmer is thus determined from balancing the positive and negative consequences of debushing on intertemporal and stochastic farm income. |
| Keywords: | bush encroachment, expected utility, farm income, intertemporal optimization, risk aversion, risk management, semi-arid rangeland |
| JEL: | Q57 Q15 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:191&r=upt |
| By: | Thomas DEMUYNCK |
| Abstract: | This research examines the computational complexity of two boundedly rational choice models that use multiple rationales to explain observed choice behavior. First, we show that the notion of rationalizability by K rationales as introduced by Kalai, Rubinstein, and Spiegler (2002) is NP-complete for K greater or equal to two. Second, we show that the question of sequential rationalizability by K rationales, introduced by Manzini and Mariotti (2007), is NP-complete for K greater or equal to three if choices are single valued, and that it is NP-complete for K greater or equal to one if we allow for multi-valued choice correspondences. Motivated by these results, we present two binary integer feasibility programs that characterize the two boundedly rational choice models and we compute their power. Finally, by using results from descriptive complexity theory, we explain why it has been so difficult to obtain `nice' characterizations for these models. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces10.23&r=upt |