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on Utility Models and Prospect Theory |
| By: | AMARANTE, Massimiliano |
| Abstract: | Let 'epsilon' be a class of event. Conditionally Expected Utility decision makers are decision makers whose conditional preferences ≿E, E є 'epsilon', satisfy the axioms of Subjective Expected Utility theory (SEU). We extend the notion of unconditional preference that is conditionally EU to unconditional preferences that are not necessarily SEU. We give a representation theorem for a class of such preferences, and show that they are Invariant Bi-separable in the sense of Ghirardato et al.[7]. Then, we consider the special case where the unconditional preference is itself SEU, and compare our results with those of Fishburn [6]. |
| Keywords: | Conditional expected utility, Unconditional preference, Invariant Bi-separable preference |
| JEL: | D81 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2013-02&r=upt |
| By: | A. Mantovi |
| Abstract: | Maps of completely proper rationality are introduced so as to parametrize departure from CARA decisionmaking in terms of level effects, and deepen the link between risk aversion, prudence and higher order concepts in connection with the objective approach to riskiness set forth by Aumann and Serrano (2008). On conceptual grounds, the focus on complete orders on preferences aligns with a line of progress of the microeconomics of risk. On technical grounds, the analytical tractability of our maps may prove effective in building explicit closed form solutions for relevant measures (for instance, the utility premium) in expected utility theory, as well as in conveying transparent insights concerning the relevance of complete properness. |
| Keywords: | risk aversion, complete properness, level effects, riskiness |
| JEL: | D11 D81 E21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:par:dipeco:2013-ep01&r=upt |
| By: | Eric André (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| Abstract: | We study the optimal portfolio selected by an investor who conforms to Siniscalchi (2009)'s Vector Expected Utility's (VEU) axioms and who is ambiguity averse. To this end, we derive a mean-variance preference generalised to ambiguity from the second-order Taylor-Young expansion of the VEU certainty equivalent. We apply this Mean Variance Variability preference to the static two-assets portfolio problem and deduce asset allocation results which extend the mean-variance analysis to ambiguity in the VEU framework. Our criterion has attractive features: it is axiomatically well-founded and analytically tractable, it is therefore well suited for applications to asset pricing as proved by a novel analysis of the home-bias puzzle with two ambiguous assets. |
| Keywords: | Vector Expected Utility; Ambiguity; Portfolio Choice; Home-bias Puzzle |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00796482&r=upt |
| By: | André Lapied (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Thomas Rongiconi (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)) |
| Abstract: | The "General-Self-Control-Preference" model introduced by Noor and Takeoka (2010) allows to take into account non linear costs of Self-Control. In this paper we extend this theory to situations in which a decision-maker faces ambiguity. We focus on the fact that lack of information is a potential source of temptation. Indeed lack of information doesn't allow the decision-maker to put a probability measure on uncertain events. Our basic hypothesis is that, in ambiguous situation, individuals are not confident enough about their beliefs and could therefore be tempted to use other beliefs to evaluate the alternatives in the second period. We study a two period model where ex ante dominated choice may tempt the decision-maker in the second period. Individuals have preferences over sets of alternatives that represent second period choices. We provide a Choice-Theoretic model where the ex ante belief is a probability measure whereas ex post belief is a Choquet-capacity, in order to take into account individual attitudes towards ambiguity in the second period. |
| Keywords: | Temptation; Self-control; Ambiguity; Choquet-Expected-Utility; Comonotonic-Temptation-Independence |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00797631&r=upt |
| By: | Hailin Sun (University of Toulouse); Sanxi Li (University of Toulouse); Tong Wang (University of East Anglia) |
| Abstract: | This paper studies the comparative statics regarding changes in risk on Nash's solution to bargaining games with stochastic outcome and disagreement points. When absolute risk tolerance is linear with constant slope, the Nash's solution to bargaining with risky outcomes and risky disagreement points can be viewed as division of divisible certainty equivalent between two risk-averse agents. We show that whether a deterioration of a bargainer's risky prospect is advantageous to his opponent often depends on whether preference displays decreasing absolute risk aversion (DARA). Specically, for perfectly correlated risky prospects, DARA à la Arrow-Pratt works to the concavity of the joint certainty equivalent with respect to a bargainer's initial wealth or size of risky exposure; for independent risky prospects, DARA à la Ross vulnerates his risk bearing under Rothschild-Stiglitz increase in risk taking the form of adding an independent noise, both leading to the bargainer's increased propensity for risk aversion as well as the joint size of the pie. These results illuminate how individual risky prospect as well as risk preference influence the cooperating partners' income shares and thus the market equilibrum of marriage formation. We also show that this result is robust under Rubinstein's non-cooperative bargaining game. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2012_36&r=upt |
| By: | Eisei Ohtaki (Faculty of Economics, Keio University); Hiroyuki Ozaki (Faculty of Economics, Keio University) |
| Abstract: | This article considers a pure-endowment stationary stochastic overlapping generations economy, in which agents have maximin expected utility preferences. Two main results are obtained. First, we show that multiple stationary monetary equilibria exist, and hence real as well as price indeterminacy arises under the assumption that aggregate shock exists. Second, we show that each of these stationary monetary equilibria is conditionally Pareto optimal; i.e., no other stationary allocations strictly Pareto dominate the equilibrium allocations. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:kei:dpaper:2012-032&r=upt |
| By: | Agostino Capponi; Jose Enrique Figueroa Lopez |
| Abstract: | We consider the problem of maximizing expected utility from terminal wealth for a power investor who can allocate his wealth in a stock, {a} defaultable bond, and a money market account. The dynamics of these security prices are governed by geometric Brownian motions modulated by a hidden continuous time finite state Markov chain}. By means of a reference probability approach to filtering in the enlarged market filtration}, we reduce the partially observed stochastic control problem to a risk sensitive control problem with full observation. We separate the latter into a pre-default and a post-default dynamic optimization subproblems, and obtain two coupled Hamilton-Jacobi-Bellman equations for the optimal value functions. We obtain a complete solution to the post-default optimization subproblem, and prove a verification theorem for the solution of the pre-default optimization subproblem. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1303.2950&r=upt |
| By: | Guo, Xu; Zhu, Xuehu; Wong, Wing-Keung; Zhu, Lixing |
| Abstract: | To satisfy the property of expected-utility maximization, Tzeng et al. (2012) modify the almost second-degree stochastic dominance proposed by Leshno and Levy (2002) and define almost higher-degree stochastic dominance. In this note, we further investigate the relevant properties. We define an almost third-degree stochastic dominance in the same way that Leshno and Levy (2002) define second-degree stochastic dominance and show that Leshno and Levy's (2002) almost stochastic dominance has the hierarchy property but not expected-utility maximization. In contrast, Tzeng et al.'s (2012) definition has the property of expected-utility maximization but not the hierarchy property. This phenomenon also holds for higher-degree stochastic dominance for these two concepts. Thus, the findings in this paper suggest that Leshno and Levy's (2002) definitions of ASSD and ATSD might be better than those defined by Tzeng et al. (2012) if the hierarchy property is considered to be an important issue. |
| Keywords: | Almost stochastic dominance; expected-utility maximization; hierarchy of stochastic dominance |
| JEL: | C02 C10 G11 |
| Date: | 2013–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44365&r=upt |
| By: | Michielsen, T.O. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract I analyze optimal natural resource use in an intergenerational model with the risk of a catastrophe. Each generation maximizes a weighted sum of discounted utility (positive) and the probability that a catastrophe will occur at any point in the future (negative). The model generates time-inconsistency as generations disagree on the relative weights on utility and catastrophe prevention. As a consequence, future generations emit too much from the current generation’s perspective and a dynamic game ensues. I consider a sequence of models. When the environmental problem is related to a scarce exhaustible resource, early generations have an incentive to reduce emissions in Markov equilibrium in order to enhance the ecosystem’s resilience to future emissions. When the pollutant is expected to become obsolete in the near future, early generations may however increase their emissions if this reduces future emissions. When polluting inputs are abundant and expected to remain essential, the catastrophe becomes a self-fulfilling prophecy and the degree of concern for catastro- phe prevention has limited or even no effect on equilibrium behaviour. |
| Keywords: | catastrophic events;decision theory;uncertainty;time consistency |
| JEL: | C73 D83 Q54 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013013&r=upt |
| By: | Irem Talasli |
| Abstract: | This study utilizes Turkish financial institutions stock market returns and balance sheet data through 2000–2001 banking sector crisis and 2007–2009 global financial crisis in order to investigate applicability of systemic expected shortfall (SES) measure introduced by Acharya et al. (2010). SES is assumed to measure contribution of each institution to systems total risk in case of a financial distress. Our regression results indicate that SES model, which includes both marginal expected shortfall and leverage ratios of institutions calculated prior to the crisis period, explains financial sector losses observed crisis periods better than generally accepted risk measures like expected shortfall, stock market beta and annualized stock return volatility estimated with the same data set. Empirical results have proved that SES is a powerful alternative in tracking potential riskiness of the financial stocks. |
| Keywords: | Systemic expected shortfall, marginal expected shortfall, systemic risk |
| JEL: | C21 C58 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1311&r=upt |