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on Utility Models and Prospect Theory |
| By: | Dentcheva, Darinka; Ruszczynski, Andrzej |
| Abstract: | We show that the main results of the expected utility and dual utility theories can be derived in a unified way from two fundamental mathematical ideas: the separation principle of convex analysis, and integral representations of continuous linear functionals from functional analysis. Our analysis reveals the dual character of utility functions. We also derive new integral representations of dual utility models. |
| Keywords: | Preferences; Utility Functions; Rank Dependent Utility Functions; Separation; Choquet Representation |
| JEL: | C0 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42736&r=upt |
| By: | Jiri, Mazurek |
| Abstract: | Many real-world decision making situation are associated with uncertainty regarding future state of the World. Traditionally, in such situation different (and discrete) scenarios – future states of nature – are considered. This domain of decision making is denoted as decision making under risk. However, limitation to some set of discrete scenarios is somewhat unnatural as future reality might not choose one of considered scenarios, but some other scenario or a scenario in between. The aim of this paper is to propose a more natural approach with continuum states of nature, where all scenarios expressed by their probability density function from some reasonable interval are taken into consideration. The approach is illustrated by a numerical example and is compared with the corresponding decision making under risk with discrete states of nature. |
| Keywords: | continuous states of nature; decision making under risk; scenario; utility function |
| JEL: | D81 |
| Date: | 2012–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42856&r=upt |
| By: | Larry G. Epstein; Shaolin Ji |
| Abstract: | This paper formulates a model of utility for a continuous time frame-work that captures the decision-maker’s concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging arguments. Ambiguous volatility implies market incompleteness that rules out perfect hedging. Consequently, hedging arguments determine prices only up to intervals. However, sharper predictions can be obtained by assuming preference maximization and equilibrium. Thus we apply the model of utility to a representative agent endowment economy to study equilibrium asset returns. A version of the C-CAPM is derived and the effects of ambiguous volatility are described. <P> |
| Keywords: | ambiguity, option pricing, recursive utility, G-Brownian motion, robust stochastic volatility, sentiment, overconfidence, optimism., |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2012s-29&r=upt |
| By: | Vieider, Ferdinand M.; Chmura, Thorsten; Martinsson, Peter |
| Abstract: | We measure risk attitudes in 30 different countries in a controlled, incentivized experiment (N = 3025). At the macroeconomic level, we find a strong and highly significant negative correlation between the risk tolerance of a country and income per capita. This gives rise to a paradox, seen that risk tolerance has been found to be positively associated with personal income within countries. We show that this paradox can be explained by unified growth theory. These results are consistent with the prediction that risk attitudes act as a transmission mechanism for growth by encouraging entrepreneurship. Furthermore, our study shows that risk attitudes vary considerably between countries and that for typical experimental stakes, risk seeking or neutrality is just as frequent as risk aversion. -- |
| Keywords: | risk attitudes,cultural comparison,economic growth,comparative development |
| JEL: | D01 D03 D81 E02 O10 O11 O12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbrad:spii2012401&r=upt |
| By: | Hillebrand, Marten |
| Abstract: | This paper studies Markov Equilibria (ME) corresponding to recursive equilibria on natural state space in the stochastic OLG model extended to include non-additive utility, nonclassical production, and Markovian production shocks. Specifically, we provide sufficient conditions under which the ME in unique. It turns out that uniqueness for a large class of economies and that restrictions either on the consumption side or the production side alone are sufficient to garantuee this result. We also discuss additional properties such as continuity or smoothness of the equilibrium mappings and whether additional recursive or non-recursive euilibria exist. -- |
| Keywords: | Markov equilibrium : Uniqueness,Overlapping generations,Nonclassical production,Markovian production shocks |
| JEL: | C62 D51 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:46&r=upt |
| By: | David Greasley; Nick Hanley; Jan Kunnas; Eoin McLaughlin; Les Oxley; Paul Warde |
| Abstract: | This paper reports the first long-run test of how Genuine Savings (also called comprehensive investment or adjusted net savings) predicts future well-being. The theory of weak sustainability suggests that a country with a positive level of Genuine Savings (GS) should experience non-declining future utility. Despite the widespread uptake of GS, previous tests of its predictive power are for short time intervals. We assemble data for British capital back to 1750, and construct several net investment measures which are used to predict two alternative measures of future well-being: future consumption per capita and real wages. An allowance for a “value of time” due to technological progress is also included. Our results show that GS-type measures can predict changes in future well-being reasonably well over 50 or 100 years into the future. |
| Keywords: | sustainable development, weak sustainability,genuine savings, comprehensive investment, future well-‐being, British economic history |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:auu:hpaper:007&r=upt |
| By: | Annette Freyberg-inan (AISSR, Universiteit van Amsterdam); Ruya Kocer (Universiteit van Amsterdam) |
| Abstract: | In his “Anecdote Concerning the Lowering of Productivity”, written in 1963, the West-German writer Heinrich Böll humorously contrasts the mindset of an enterprising capitalist, bent on the maximization of profit, with that of a person we might call a profit “satisficer,” a maximizer of leisure or happiness, or, less politely, a bum. The anecdote is suggestive, as it leaves the reader wondering whose behavior is in fact rational, or whether we observe here a clash of two rationalities supported by different economic cultures and (un)explained by different theories of economic behavior. Motivated by the question whose behavior makes which sort of sense, we present in this paper a system of utility functions that captures both logics of action simultaneously using purely rational choice based reasoning. The three formulas are integrated into a single and simple dynamic equations system which allows us to identify key factors in the generation of utilities explaining the real-life diversity of work-leisure decisionmaking, in particular the impact of occupational dynamics, personality characteristics, and government intervention. The model sheds considerable light on the familiar yet under-investigated phenomenon of widely varying levels of what Böll calls “Arbeitsmoral,” is interestingly rendered in the English translation as “productivity,” and what has rarely been acknowledged for what it is: differences in choices on work-leisure trade-offs and economic lifestyles that pose an important challenge to mainstream microeconomic, welfare state, and development theory. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:aia:aiaswp:123&r=upt |
| By: | Harold L. Cole (Department of Economics, University of Pennsylvania); Soojin Kim (Department of Economics, University of Pennsylvania); Dirk Krueger (Department of Economics, University of Pennsylvania) |
| Abstract: | This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation. |
| Keywords: | Health, Insurance, Incentive |
| JEL: | E61 H31 I18 |
| Date: | 2012–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:12-047&r=upt |
| By: | Donnellan, Trevor; Hennessy, Thia |
| Abstract: | This paper presents a theoretical model for the analysis of decisions regarding farm household labour allocation. The agricultural household model is selected as the most appropriate theoretical framework; a model based on the assumption that households behave to maximise utility, which is a function of consumption and leisure, and is subject to time and budget constraints. The model can be used to describe the role of government subsidies in farm household labour allocation decisions; in particular the impact of decoupled subsidies on labour allocation can be examined. Decoupled subsidies are a labour-free payment and as such represent an increase in labour-free income or wealth. An increase in wealth allows farm households to work less while maintaining consumption. On the other hand, decoupled subsidies represent a decline in the return to farm labour and may lead to a substitution effect, i.e. farmers may choose to substitute non-farm work for farm work. The theoretical framework proposed in this paper allows us to examine these two conflicting effects. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eps:fmwppr:140&r=upt |