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on Utility Models and Prospect Theory |
| By: | DENUIT, Michel (Université catholique de Louvain, Institut des Sciences Actuarielles & Institut de Statistique, B-1348 Louvain-la-Neuve, Belgium); EECKHOUDT, Louis (IESEG School of Management, LEM, Université Catholique de Lille, France; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); TSETLIN, Ilia (INSEAD, Singapore); WINKLER, Robert L. (Fuqua School of Business, Duke University, Durham, USA) |
| Abstract: | Stochastic dominance permits a partial ordering of alternatives (probability distributions on consequences) based only on partial information about a decision maker’s utility function. Univariate stochastic dominance has been widely studied and applied, with general agreement on classes of utility functions for dominance of different degrees. Extensions to the multivariate case have received less attention and have used different classes of utility functions, some of which require strong assumptions about utility. We investigate multivariate stochastic dominance using a class of utility functions that is consistent with a basic preference assumption, can be related to well-known characteristics of utility, and is a natural extension of the stochastic order typically used in the univariate case. These utility functions are multivariate risk averse, and reversing the preference assumption allows us to investigate stochastic dominance for utility functions that are multivariate risk seeking. We provide insight into these two contrasting forms of stochastic dominance, develop some criteria to compare probability distributions (hence alternatives) via multivariate stochastic dominance, and illustrate how this dominance could be used in practice to identify inferior alternatives. Connections between our approach and dominance using different stochastic orders are discussed. |
| Keywords: | decision analysis: multiple criteria, risk; group decisions; utility/preference: multiattribute utility, stochastic dominance, stochastic orders |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010044&r=upt |
| By: | Yang, Chun-Lei; Yao, Lan |
| Abstract: | We study the two-color problem by Ellsberg (1961) with the modification that the decision maker draws twice with replacement and a different color wins in each draw. The 50-50 risky urn turns out to have the highest risk conceivable among all prospects including the ambiguous one, while all feasible color distributions are mean-preserving spreads to one another. We show that the well-known second-order sophisticated theories like MEU, CEU, and REU as well as Savage’s first-order theory of SEU share the same predictions in our design, for any first-order risk attitude. Yet, we observe that substantial numbers of subjects violate the theory predictions even in this simple design. |
| Keywords: | Ellsberg paradox; Ambiguity; Second-order risk; Second-order preference theory; Experiment |
| JEL: | D81 C91 |
| Date: | 2011–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:28531&r=upt |
| By: | SCHROYEN, Fred (Department of Economics, Norwegian School of Economics and Business Administration, N-5045 Bergen, Norway); OYENUGA, Adekola (Department of Economics, Norwegian School of Economics and Business Administration, N-5045 Bergen, Norway) |
| Abstract: | We develop rules for pricing and capacity choice for an interruptible service that recognise the interdependence between consumers' perceptions of system reliability and their market behaviour. Consumers post ex ante demands, based on their expectations on aggregate demand. Posted demands are met if ex post supply capacity is sufficient. However, if supply is inadequate all ex ante demands are proportionally interrupted. Consumers' expectations of aggregate demand are assumed to be rational. Under reasonable values for the consumer's degrees of relative risk aversion and prudence, demand is decreasing in supply reliability. We derive operational expressions for the optimal pricing rule and the capacity expansion rule. We show that the optimal price under uncertainty consists of the optimal price under certainty plus a markup that positively depends on the degrees of relative risk aversion, relative prudence and system reliability. We also show that any reliability enhancing investment - though lowering the operating surplus of the public utility - is socially desirable as long as it covers the cost of investment. |
| Keywords: | D11, D24, D45, H42, Q25 |
| Date: | 2010–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010070&r=upt |
| By: | Dietrich Franz; List Christian (METEOR) |
| Abstract: | Rational choice theory analyzes how an agent can rationally act, given his or her preferences, but says little about where those preferences come from. Instead, preferences are usually assumed to be .xed and exogenously given. We introduce a framework for conceptualizing preference formation and preference change. In our model, an agent.s preferences are based on certain .motivationally salient.properties of the alternatives over which the preferences are held. Preferences may change as new properties of the alternatives become salient or previously salient ones cease to be so. We suggest that our approach captures endogenous preferences in various contexts, and helps to illuminate the distinction between formal and substantive concepts of rationality, as well as the role of perception in rational choice. |
| Keywords: | microeconomics ; |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2011005&r=upt |
| By: | Itzhak Gilboa; Massimo Marinacci |
| Abstract: | This is a survey of some of the recent decision-theoretic literature involving beliefs that cannot be quantified by a Bayesian prior. We discuss historical, philosophical, and axiomatic foundations of the Bayesian model, as well as of several alternative models recently proposed. The definition and comparison of ambiguity aversion and the updating of non-Bayesian beliefs are briefly discussed. Finally, several applications are mentioned to illustrate the way that ambiguity (or “Knightian uncertainty”) can change the way we think about economic problems. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:379&r=upt |
| By: | Klaus Abbink; David Masclet; Matthijs van Veelen |
| Abstract: | We study antisocial preferences in simple money-burning tasks. A decision maker can choose whether or not to reduce another person’s payoff at an own cost. We vary across tasks the initial endowment of the decider and the victim. We find that most conventional expectations are refuted: Subjects burn more when inequality is advantageous than when it is disadvantageous. Equitable distributions are particularly prone to destruction. These effects are reversed, however, when the equivalent tasks are framed as creation instead of destruction. <P>Nous étudions les préférences antisociales à l’aide d’un jeu simple de “money burning”. Dans ce jeu, un agent doit choisir s’il souhaite ou pas réduire, moyennant un cout, le gain d’un autre agent. Nous avons fait varier les gains des deux agents. Nos résultats indiquent que les agents n’hésitent pas à « bruler » l’argent des autres, y compris lorsque les écarts de gains sont à l’avantage du décideur, ce qui réfute clairement l’hypothèse d’aversion à l’inégalité. Les cas où les gains du décideur et de la victime sont identiques sont particulièrement sujets à destruction. Nous observons également que les décisions de destructions sont particulièrement sensibles aux effets de framing. |
| Keywords: | experiment, money burning, framing effects, preferences anti-sociales, expérience, jeu de « money burning », effets de framing, préférences anti-sociales |
| Date: | 2011–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-11&r=upt |
| By: | Jean-Louis Arcand (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I) |
| Abstract: | In their celebrated contribution on credit rationing, Stiglitz and Weiss (1981) showed that the expected return to the borrower on a loan is increasing in the risk of the project it funds. In this paper, I show that their results do not necessarily carry over to the case where the agents' preferences can be described by rank-dependent expected utility (RDEU). In particular, a pessimistic probability distortion function for borrowers can yield sufficient concavity in returns for the latter to be decreasing in risk, thus eliminating adverse selection. Whether credit rationing can obtain or not is then shown to depend upon the interaction between borrower pessimism and lender optimism. |
| Keywords: | Keywords: rank-dependent expected utility;credit rationing |
| Date: | 2011–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00562645&r=upt |
| By: | Kasper Larsen; Gordan Zitkovic |
| Abstract: | We consider a utility-maximization problem in a general semimartingale financial market, subject to constraints on the number of shares held in each risky asset. These constraints are modeled by predictable convex-set-valued processes whose values do not necessarily contain the origin, i.e., no risky investment at all may be inadmissible. Such a setup subsumes the classical constrained utility-maximization problem, as well as the problem where illiquid assets or a random endowment are present. Our main result establishes existence of the optimal trading strategies in such markets under no smoothness requirements on the utility function, and relates them to the corresponding dual objects. Moreover, we show that the dual optimization problem can be posed over a set of countably-additive probability measures, thus eschewing the need for the usual finitely-additive enlargement. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1102.0346&r=upt |
| By: | Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We underline that some results obtained in the literature on central bank transparency may be quite different when we take a non-Bayesian approach to uncertainty, where "ambiguity" is taken into account. We consider some specific argument of the literature (obtained under a Bayesian approach), which implies that political uncertainty can be beneficial and central bank transparency harmful. We show that when ambiguity is large enough, these results do not hold anymore: political uncertainty is always harmful and central bank transparency always beneficial. Furthermore, as soon as we depart from the Bayesian case, Knightian uncertainty is always harmful. JEL Classification: E58; E52 Keywords: central bank transparency; political uncertainty; Knightian uncertainty; ambiguity; non-Bayesian approach |
| Keywords: | central bank transparency; political uncertainty; Knightian uncertainty; ambiguity; non-Bayesian approach |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00562662&r=upt |
| By: | Chevalier, Julie |
| Abstract: | Dans les analyses coût-utilité, les conséquences d’un traitement sont souvent décrites en QALY (Quality Adjusted Life Year). Cet indicateur consiste à pondérer le temps passé dans un état de santé donné par un coefficient (l’utilité) rendant compte de la valeur accordée à cet état. Utiliser un tel indicateur suppose deux choses : connaître l’état de santé du patient et la valeur affectée par la collectivité à cet état. Pour cela, des index d’états de santé pondérés par les préférences, ou index d’utilité, ont été développés. L’un des plus utilisé, du fait de sa simplicité est l’EQ-5D. Le questionnaire de qualité de vie a été développé et validé dans un grand nombre de pays, dont la France, mais nous ne disposons actuellement pas de fonction d’utilité française permettant d’associer un poids à chacun des états de santé défini par cet instrument. Jusqu’à maintenant, nous utilisions les fonctions calculées dans d’autres pays. Les préférences individuelles peuvent cependant changer d’un pays à l’autre et les fonctions d’utilité estimées dans des pays différents peuvent présenter des différences. En France, l‘évaluation économique est appelée à prendre une place croissante dans les décisions publiques d’accès au marché remboursé. Dans ce contexte, la thèse s’articule autour de deux objectifs. Le premier concerne l’adaptation de l’instrument EQ-5D au contexte français en produisant d’une part, une version française du questionnaire plus discriminante que celle habituellement utilisée et, d’autre part, un value-set calculé sur la base des préférences révélées en France. Le second objectif s’inscrit dans le développement des méthodologies utilisées pour construire l’instrument et concerne plus particulièrement une nouvelle méthode de valorisation, le Scoring. |
| Abstract: | In cost-utility analysis results are often processed in terms of QALY (Quality Adjusted Life Year). The duration of a given health state is weighted with a coefficient calculated based on its associated quality of life. Using such an indicator assumes two things: knowing the health state of the patient and the utility level associated to that state. In this purpose preference-based indexes have been developed. The EQ-5D is one of the most frequently used indexes. It has been developed and validated in many countries, including France, but the French utility function has not been calculated. This function gives a weight to each health state taking into account the local populations’ preferences. In absence of set of national population-based utility weights, a foreign value-set is used. However preferences for different heath states may not necessarily be all-purpose. Several studies have backed up this assumption pointing out that utilities function estimated in different countries could present some differences. Thus, utility values should be developed locally. The dissertation has several objectives: to provide a value-set for the EQ-5D health states in the French context, to develop a revised version of the EQ-5D with 5 levels for each dimension and to test a new valuation method called Scoring. |
| Keywords: | Preferences; Valuation; Utility; Health-related quality of life; Révélation des préférences; Valorisation; Utilité; EQ-5D; Qualité de vie; |
| JEL: | D61 I31 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/5598&r=upt |
| By: | Dewachter, Hans; Iania, Leonardo; Lyrio, Marco |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_221&r=upt |