|
on Utility Models and Prospect Theory |
| By: | Xiao, Yu; Fukuda, Daisuke |
| Abstract: | Recent studies show that traveler’s scheduling preferences compose a willingness-to-pay function directly corresponding to aggregate measurement of travel time variability under some assumptions. This property makes valuation on travel time variability transferable from context to context, which is ideal for extensive policy evaluation. However, if respondents do not exactly maximizing expected utility as assumed, such transferability might not hold because two types of potential errors: (i) scheduling preference elicited from stated preference experiment involving risk might be biased due to misspecification and (ii) ignoring the cost of misperceiving travel time distribution might result in undervaluation. To find out to what extent these errors matter, we reformulate a general scheduling model under rank-dependent utility theory, and derive reduced-form expected cost functions of choosing suboptimal departure time under two special cases. We estimate these two models and calculate the empirical cost due to misperceived travel time variability. We find that (i) travelers are mostly pessimistic and thus tend to choose departure time too earlier to bring optimal cost, (ii) scheduling preference elicited from stated choice method could be quite biased if probability weight- ing is not considered and (iii) the extra cost of misperceiving travel time distribution contributes trivial amount to the discrepancy between scheduling model and its reduced form. |
| Keywords: | travel time variability, scheduling delay, departure time choice, rank-dependent utility |
| JEL: | D61 D81 R41 |
| Date: | 2013–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49737&r=upt |
| By: | Amnon Levy (University of Wollongong) |
| Abstract: | This paper provides a utility-based definition of binge drinking and examines the compatibility of this phenomenon with rational decision making. Prohibition of young people’s consumption of alcohol is frequently violated with binge-drinking in groups. The analysis considers the roles of peer-pressure, full price of alcohol and crowding in underage group-drinking sessions and identifies the conditions for binge-drinking by expected utility maximizing members. Rational binge-drinking occurs when the impact of the peer-pressure on the individual member’s utility exceeds the loss of utility from the forgone spending on all other goods associated with the expected full marginal cost of consuming alcohol. |
| Keywords: | Alcohol; Minimum Age; Peer Pressure; Rationality; Binge Drinking |
| JEL: | D1 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp13-03&r=upt |
| By: | Yuichi Kitamura (Cowles Foundation, Yale University); Jorg Stoye (Dept. of Economics, Cornell University) |
| Abstract: | This paper develops new tools for the analysis of Random Utility Models (RUM). The leading application is stochastic revealed preference theory, that is, the modeling of aggregate choice behavior in a population characterized by individual rationality and unobserved heterogeneity. We test the null hypothesis that a repeated cross-section of demand data was generated by such a population, without restricting unobserved heterogeneity in any form whatsoever. Equivalently, we empirically test McFadden and Richter's (1991) Axiom of Revealed Stochastic Preference (ARSP, to be defined later), using only nonsatiation and the Strong Axiom of Revealed Preference (SARP) as restrictions on individual level behavior. Doing this is computationally challenging. We provide various algorithms that can be implemented with reasonable computational resources. Also, new tools for statistical inference for inequality restrictions are introduced in order to deal with the high-dimensionality and non-regularity of the problem at hand. |
| Keywords: | Stocastic rationality |
| JEL: | C14 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1902&r=upt |
| By: | Till Strohsal; ; ; |
| Abstract: | This paper examines the preferred-habitat theory under time-varying risk aversion. The predicted positive relation between the term spread and relative supply of longer-term debt is stronger when risk aversion is high. To capture this effect, a time-varying coefficient model is introduced and applied to German bond data. The results support the theoretical predictions and indicate substantial time variation: under high risk aversion, yield spreads react about three times more strongly than when risk aversion is low. The accumulated response of term spreads to a one standard deviation change in debt supply ranges between 5 and 33 basis points. |
| Keywords: | preferred-habitat, time-varying risk aversion, yield spreads, bond supply |
| JEL: | E43 C22 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2013-043&r=upt |
| By: | Hans F\"ollmer; Alexander Schied |
| Abstract: | In the past decades, advanced probabilistic methods have had significant impact on the field of finance, both in academia and in the financial industry. Conversely, financial questions have stimulated new research directions in probability. In this survey paper, we review some of these developments and point to some areas that might deserve further investigation. We start by reviewing the basics of arbitrage pricing theory, with special emphasis on incomplete markets and on the different roles played by the "real-world" probability measure and its equivalent martingale measures. We then focus on the issue of model ambiguity, also called Knightian uncertainty. We present two case studies in which it is possible to deal with Knightian uncertainty in mathematical terms. The first case study concerns the hedging of derivatives, such as variance swaps, in a strictly pathwise sense. The second one deals with capital requirements and preferences specified by convex and coherent risk measures. In the final two sections we discuss mathematical issues arising from the dramatic increase of algorithmic trading in modern financial markets. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1309.7759&r=upt |
| By: | Shawn Cole; Martin Kanz; Leora Klapper |
| Abstract: | We use an experiment with commercial bank loan officers to test how performance based compensation affects risk-assessment and lending. High-powered incentives lead to greater screening effort and more profitable lending decisions. This effect, however, is muted by deferred compensation and limited liability, two standard features of loan officer incentive contracts. We find that career concerns and personality traits affect screening behavior, but show that the response to monetary incentives does not vary with traits such as risk-aversion, optimism or overconfidence. Finally, we present evidence that incentive contracts distort the assessment of credit risk, even among trained professionals with many years of experience. Loans evaluated under permissive incentives are rated significantly less risky than the same loans evaluated under pay-for-performance. |
| JEL: | D03 G21 J33 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19472&r=upt |
| By: | Khelifi, Atef |
| Abstract: | Unexpectedly, and as a result of a simple exercise of intellectual curiosity, the resolution of the Ramsey growth problem with a Utility function underlying relative preferences for consumption and savings, provides remarkable results and interpretations. An advanced microeconomic analysis of this particular assumption which follows consequently, and presumably the sole one of the literature, appears to bring important new insights to the consumer theory, and to lead reasonably to the question of the validity of the current version of the Ramsey model. |
| Keywords: | Ramsey model; Optimal Growth; Optimal control; Savings decision |
| JEL: | D5 D91 E1 E2 O41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50302&r=upt |
| By: | Guilhem Lecouteux (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | A central assumption in economics is that individuals are rational in the sense that they seek to satisfy their preferences, by choosing the action that maximizes a utility function that represents those preferences. However, it appears that in strategic interaction with other rational agents, the individuals can bene t from strategic commitments. We determine the set of games for which strategic commitments can be bene cial to the players, by building an analytical framework in which players can choose their own preferences before playing a game. We show that players make strategic commitments as soon as there exists a Stackelberg equilibrium that is not a Nash equilibrium, but also that there always exists at least one set of preference relations at the equilibrium such that a Nash equilibrium is implemented. We then show that the possibility of making strategic commitments generates cooperative behaviours in the case of supermodular games. |
| Keywords: | strategic commitment, choice of preferences, Stackelberg, supermodularity |
| Date: | 2013–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00864704&r=upt |
| By: | Attila Ambrus (Department of Economics, Duke University); Ben Greiner (School of Economics, Australian School of Business, the University of New South Wales); Parag Pathak (Department of Economics, Massachusetts Institute of Technology) |
| Abstract: | This paper experimentally investigates how individual preferences, through unrestricted deliberation, get aggregated into a group decision in two contexts: reciprocating gifts, and choosing between lotteries. In both contexts we find that median group members have a significant impact on the group decision, but particular other members also have some influence. Non-median members closer to the median tend to have more influence than other members. By investigating the same individual’s influence in different groups, we find evidence for relative position in the group having a direct effect on influence. We do not find evidence that group choice exhibits a shift in a particular direction that is independent of member preferences and caused by the group decision context itself. We also find that group deliberation not only involves bargaining and compromise, but it also involves persuasion: preferences tend to shift towards the choice of the individual’s previous group, especially for those with extreme individual preferences. |
| Keywords: | group decision-making, role of deliberation, social influence |
| JEL: | C72 C92 H41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2013-24&r=upt |
| By: | Frank Hespeler (Ben Gurion University); Marco M. Sorge (Università di Napoli Federico II and CSEF) |
| Abstract: | This paper studies first-order approximate solutions to near-rational dynamic stochastic models. Under near-rationality, subjective beliefs are distorted away from rational expectations via a change of measure process which fulfils some regularity conditions. As a main result, we show that equilibrium indeterminacy may arise even when the martingale representation of beliefs distortion depends on the economy's fundamentals solely. This provides theoretical support to the modeling assumptions of Woodford [American Economic Review 100, 274-333 (2010)] |
| Keywords: | Near-Rationality; Perturbation methods; Equilibrium indeterminacy |
| JEL: | D84 E0 C62 C63 |
| Date: | 2013–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:339&r=upt |
| By: | Parrotta, Pierpaolo (Aarhus School of Business); Smith, Nina (Aarhus University) |
| Abstract: | This paper investigates the relationship between gender of the CEO and composition of the board of directors (female chairman and share of women in the boardroom) and firm's risk attitudes measured as variability in four firm outcome variables (investments, profits, return to equity, and sales). Using a merged employer-employee panel sample of Danish companies with more than 50 employees, we find extensive evidence of a negative association between female CEO and firm's risk attitudes. This finding might be consistent with the theoretical assumption according to which women typically present a substantially higher risk aversion profile and put more effort in monitoring firm activities than men in the financial matter domains. A number of robustness checks corroborate and better explain our main findings. |
| Keywords: | firm performance, risk aversion, female CEO |
| JEL: | G34 J16 L25 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7613&r=upt |
| By: | Guidon Fenig (University of British Columbia); Mariya Mileva (Kiel Institute for the World Economy); Luba Petersen (Simon Fraser University) |
| Abstract: | In this paper we demonstrate how an experimental general equilibrium economy can be implemented in a laboratory setting in a simplified, time- and cost-efficient manner. We then introduce an asset market to study speculative behavior within a general equilibrium setting where subjects' objective is to maximize their utility from consumption and leisure. Subjects are endowed with units of an asset but are not obliged to participate in the asset market. Asset prices consistently grow above fundamental value and do not decline significantly with learning. Finally, we introduce a policy preventing subjects from borrowing to purchase assets. The borrowing constraint does not have any effect on the deviation of asset prices from fundamental value. Asset market activity has no significant effect on the real economy in either treatment, suggesting a limited role for monetary policy intervention. |
| Keywords: | Experimental macroeconomics, laboratory experiment, monetary policy, asset price bubbles, general equilibrium, production economy |
| JEL: | C61 D81 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp13-08&r=upt |
| By: | Henry Thompson |
| Abstract: | This paper develops a competitive model of trade between three countries with constant cost production and identical utility functions. Trade depends on country size and productivity, and may be limited to two of the countries. Regional trade is observed if they happen to be closer together. The two countries trading only with each other avoid export competition. A country is excluded from trade if it has too little production potential. In the model with three goods, trade is limited to two countries unless each ranks highest in production potential for a unique good. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-15&r=upt |