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on Utility Models and Prospect Theory |
| By: | Shyti , Anisa |
| Abstract: | Entrepreneurship studies have attributed to over-confidence decisions to start a new venture. Many decision situations, through which over-confidence is measured, entail some degrees of uncertainty, (e.g., related to own skill or to competition). The aspect of uncertainty is largely neglected in over-confidence studies or entrepreneurial research. Both uncertainty and over-confidence influence individuals’ likelihood perceptions. Nevertheless, these two aspects are seldom jointly investigated, and the little evidence provides inconclusive results. In this study, we experimentally investigate how uncertainty, as a property of the situation, and over-confidence, as a characteristic of decision makers’ beliefs, influence choice behavior. Our findings with Executive MBA participants show that over-confident decision makers choose less uncertain options for low likelihood outcomes and more uncertain options for high likelihood outcomes, contrary to neutral confidence decision makers, whose choices are in line with standard Prospect Theory predictions |
| Keywords: | entrepreneurship; ambiguity attitudes; decision making; over-con fidence |
| JEL: | D80 D81 L26 |
| Date: | 2013–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0982&r=upt |
| By: | Öztürk Z.E.; Bosmans K.G.M. (GSBE) |
| Abstract: | We characterize a class of envy measures. There are three key axioms. Decomposability requires that overall envy is the sum of the envy within and between subgroups. The other two axiomsdeal with the two-individual setting and specify how the envy measure should react to simple changes in the individuals commodity bundles. The characterized class measures the envy of oneindividual to another by the relative utility difference using the envious utility function between the bundle of the envied and the bundle of the envious. The particular utility representation to be used is fixed by the axioms. The class measures overall envy by the sum of these transformed relative utility differences. We discuss our results in the light of previous contributions to envy measurement and multidimensional inequality measurement. |
| Keywords: | Equity, Justice, Inequality, and Other Normative Criteria and Measurement; |
| JEL: | D63 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013063&r=upt |
| By: | Jim Dolmas |
| Abstract: | In this paper, I combine disappointment aversion, as employed by Routledge and Zin and Campanale, Castro and Clementi, with rare disasters in the spirit of Rietz, Barro, Gourio, Gabaix and others. I find that, when the model’s representative agent is endowed with an empirically plausible degree of disappointment aversion, a rare disaster model can produce moments of asset returns that match the data reasonably well, using disaster probabilities and disaster sizes much smaller than have been employed previously in the literature. This is good news. Quantifying the disaster risk faced by any one country is inherently difficult with limited time series data. And, it is open to debate whether the disaster risk relevant to, say, US investors is well-approximated by the sizable risks found by Barro and co-authors in cross-country data. On the other hand, we have evidence that individuals tend to over-weight bad or disappointing outcomes, relative to the outcomes’ weights under expected utility. Recognizing aversion to disappointment means that disaster risks need not be nearly as large as suggested by the cross-country evidence for a rare disaster model to produce average equity premia and risk-free rates that match the data. I illustrate the interaction between disaster risk and disappointment aversion both analytically and in the context of a simple Rietz-like model of asset-pricing with rare disasters. I then analyze a richer model, in the spirit of Barro, with a distribution of disaster sizes, Epstein-Zin preferences, and partial default (in the event of a disaster) on the economy’s ‘risk-free’ asset. For small elasticities of intertemporal substitution, the model is able to match almost exactly the means and standard deviations of the equity return and risk-free rate, for disaster risks one-half or one-fourth the estimated sizes from Barro. For larger elasticities of intertemporal substitution, the model’s fit is less satisfactory, though it fails in a direction not often viewed as problematic—it under-predicts the volatility of the riskfree rate. Even so, apart from that failing, the results are broadly similar to those obtained by Gourio but with disaster risks one-half or onefourth as large. |
| Keywords: | Interest rates ; Financial markets |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1309&r=upt |
| By: | Alison L. Booth; Lina Cardona-Sosa; Patrick Nolen |
| Abstract: | Single-sex classes within coeducational environments are likely to modify students' risk-taking attitudes in economically important ways. To test this, we designed a controlled experiment using first year college students who made choices over real-stakes lotteries at two distinct dates. Students were randomly assigned to weekly classes of three types: all female, all male, and coeducational. They were not allowed to change group subsequently. We found that women are less likely to make risky choices than men at both dates. However, after eight weeks in a single-sex class environment, women were significantly more likely to choose the lottery than their counterparts in coeducational groups. These results are robust to the inclusion of controls for IQ and for personality type, as well as to a number of sensitivity tests. Our findings suggest that observed gender differences in behavior under uncertainty found in previous studies might partly reflect social learning rather than inherent gender traits. |
| Keywords: | Gender, risk preferences, single-sex groups, cognitive ability. Classification JEL: C9, C91, C92, J16, D01, D80, J16, J24 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:786&r=upt |
| By: | Patricia C. Mosser; Joseph Tracy; Joshua Wright |
| Abstract: | We explore the capital structure and governance of a mortgage-insuring securitization utility operating with government reinsurance for systemic or “tail” risk. The structure we propose for the replacement of the GSEs focuses on aligning incentives for appropriate pricing and transfer of mortgage risks across the private sector and between the private sector and the government. We present the justification and mechanics of a vintage-based capital structure, and assess the components of the mortgage guarantee fee, whose size we find is most sensitive to the required capital ratio and the expected return on that capital. We discuss the implications of selling off some of the utility’s mortgage credit risk to the capital markets and how the informational value of such transactions may vary with the level of risk transfer. Finally, we explore how mutualization could address incentive misalignments arising out of securitization and government insurance, as well as how the governance structure for such a financial market utility could be designed. |
| Keywords: | Mortgage-backed securities ; Government-sponsored enterprises ; Mortgages ; Risk management |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:644&r=upt |
| By: | Stéphane Gonzalez (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Michel Grabisch (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | The paper proposes a new concept of solution for TU games, called multicoalitional solution, which makes sense in the context of production games, that is, where v(S) is the production or income per unit of time. By contrast to classical solutions where elements of the solution are payoff vectors, multicoalitional solutions give in addition an allocation time to each coalition, which permits to realize the payoff vector. We give two instances of such solutions, called the d-multicoalitional core and the c-multicoalitional core, and both arise as the strong Nash equilibrium of two games, where in the first utility per active unit of time is maximized, while in the second it is the utility per total unit of time. We show that the d-core (or aspiration core) of Benett, and the c-core of Guesnerie and Oddou are strongly related to the d-multicoalitional and c-multicoalitional cores, respectively, and that the latter ones can be seen as an implementation of the former ones in a noncooperative framework. |
| Keywords: | Cooperative game; core; aspiration core; strong Nash equilibrium |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00881108&r=upt |
| By: | Jens Leth Hougaard (Department of Food and Resource Economics, University of Copenhagen); Kurt Nielsen (Department of Food and Resource Economics, University of Copenhagen); Athanasios Papakonstantinou (Department of Food and Resource Economics, University of Copenhagen) |
| Abstract: | We analyze a simple multi-attribute procurement auction that uses yardstick competition to settle prices. Upon receiving the submitted bids, a mediator computes the yardstick prices (bids) by a linear weighting of the other participants’ bids. The auction simplifies the procurement process by reducing the principal’s articulation of his preferences to simply choosing the most preferred offer as if it was a market with posted prices. Although truthful reporting does not constitute a Nash equilibrium, we demonstrate by simulations that truth-telling may indeed be some kind of focal point. By focusing on the initial winner in case everyone tells the truth, we show that even if the other bidders are allowed to misreport by as much as 20% of their true cost, the initial winner remains the winner in 80% of all simulated auctions in the case of 3 competing bidders. Furthermore, as it takes aggressive bidding to become the new winner of the auction, we show that the new winners typically win with a loss. Combining the two results we have that, almost independently of the number of competing bidders and the degree of misreporting, approximately 90% of all simulations will either have the same initial winner or a new winner who wins the auction with a loss in its utility. |
| Keywords: | Multi-attribute auction, yardstick competition, articulation of preferences, simulation |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:foi:msapwp:02_2013&r=upt |
| By: | Anastasios G. Karantounias |
| Abstract: | I study optimal capital and labor income taxation in a business cycle model with the recursive preferences of Epstein and Zin (1989) and Weil (1990). In contrast to the case of time-additive expected utility, I find that it is no longer optimal to make the welfare cost of distortionary taxes constant over states and dates. This dramatically alters standard taxation prescriptions: optimal policy calls for taxation at the intertemporal margin, variation of taxation at the intratemporal margin, and persistence of labor taxes independent of the stochastic properties of exogenous shocks. Ignoring the distinction between smoothing over time and smoothing over states is not an innocuous assumption for optimal policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-07&r=upt |
| By: | Paul Sullivan, (U.S. Bureau of Labor Statistics); Ted To (U.S. Bureau of Labor Statistics) |
| Abstract: | The empirical literature on compensating wage differentials has a mixed history. While there have been some successes, much of this literature finds weak support for the theory of equalizing differences. We argue that it is dispersion in total job values or "job dispersion" that leads to biased compensating wage differential estimates. We begin by demonstrating how job dispersion can lead to biased hedonic estimates. Then we take a partial equilibrium on-the-job search model with utility from non-wage job characteristics, structurally estimate it and then simulate a dataset. Using our simulated dataset, we conduct a detailed analysis of the sources of bias in hedonic wage estimates. While worker heterogeneity and job dynamics are important sources of job dispersion, a significant proportion of the variation in jobs can only be explained by the inherent randomness of job offers. |
| Keywords: | compensating wage differential, theory of equalizing differences, revealed preference, on-the-job search |
| JEL: | J3 J42 J64 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bls:wpaper:ec130100&r=upt |
| By: | Holger Dette (University of Bochum); Stefan Hoderlein (Boston College); Natalie Neumeyer (University of Hamburg) |
| Abstract: | This paper is concerned with testing rationality restrictions using quantile regression methods. Specifically, we consider negative semidefiniteness of the Slutsky matrix, arguably the core restriction implied by utility maximization. We consider a heterogeneous population characterized by a system of nonseparable structural equations with infinite dimensional unobservable. To analyze this economic restriction, we employ quantile regression methods because they allow us to utilize the entire distribution of the data. Difficulties arise because the restriction involves several equations, while the quantile is a univariate concept. We establish that we may test the economic restriction by considering quantiles of linear combinations of the dependent variable. For this hypothesis we develop a new empirical process based test that applies kernel quantile estimators, and derive its large sample behavior. We investigate the performance of the test in a simulation study. Finally, we apply all concepts to Canadian microdata, and show that rationality is not rejected. |
| Keywords: | Nonparametric Testing, Heterogeneity, Integrability, Nonseparable Models, Consumer Demand, Quantile Regression |
| Date: | 2013–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:836&r=upt |