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on Utility Models and Prospect Theory |
| By: | Harin, Alexander |
| Abstract: | This is a very draft version of the report "The random-lottery incentive system. Can p~1 experiments deductions be correct?". It is published to extend the abstract of the report. Aczél and Luce emphasized a fundamental question: whether W(1)=1 (whether the Prelec weighting function equals 1 at p=1). A purely mathematical theorem proves W(1) |
| Keywords: | utility; prospect theory; random-lottery incentive system; Prelec weighting function; experiments; |
| JEL: | C1 C81 C9 C91 D81 |
| Date: | 2014–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53880&r=upt |
| By: | Simone Cerreia-Vioglio (Department of Decision Sciences, Università Bocconi); David Dillenberger (Department of Economics, University of Pennsylvania); Pietro Ortoleva (Department of Economics, Columbia University) |
| Abstract: | Many violations of the Independence axiom of Expected Utility can be traced to subjects' attraction to risk-free prospects. The key axiom in this paper, Negative Certainty Independence (Dillenberger, 2010), formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy Negative Certainty Independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how to evaluate a given lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a well-defined sense. We show that our representation can also be derived from a `cautious' completion of an incomplete preference relation. |
| Keywords: | Preferences under risk, Allais paradox, Negative Certainty Independence, Incomplete preferences, Cautious Completion, Multi-Utility representation |
| JEL: | D80 D81 |
| Date: | 2014–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-005&r=upt |
| By: | Anna Conte (Strategic Interaction Group, Max Planck Institute of Economics, Jena, and Department of Economics and Quantitative methods, WBS, University of Westminster); John D. Hey (Department of Economics and Related Studies, University of York); Ivan Soraperra (Dipartimento di Scienze Economiche, University of Verona,) |
| Abstract: | This paper estimates the determinants of decision time for different types of decision maker in the context of an experimental investigation of multiple prior models of behaviour under ambiguity. Four models are considered: Expected Utility, Smooth, Rank Dependent Expected Utility and Alpha model. The results of a mixture model which assigns subjects to types enable us to distinguish the factors influencing the decision time of each of these four types. We find that the different types are influenced by different factors. In general, the Rank Dependent type takes more time, followed by the Smooth, the Expected Utility and finally the Alpha type, whose decision time is always the lowest. Our results reflect the relative complexity of the preference functionals used by the different types. Consequently, the importance of looking at the process of pairwise choices rather than simply at the choice made is raised to the attention of theorists and analysts. |
| Keywords: | decision time, choice under uncertainty, censored regression |
| JEL: | C23 C24 C91 D81 |
| Date: | 2014–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-004&r=upt |
| By: | Drew Zhu |
| Abstract: | Time might be the scarcest resource for every individual. Time saving should be one of a few specific starting points of Economics. Utility theory is not a perfect theory, which heavily depends on a serial of unrealistic assumptions, and sets Economics on the shifting sands. Time saving could be a solid rock for Economics to build on. In modern society, we typically get more free time by spending some of our whole time to work and earn money. According to a new attribute theory that is different from Lancasterâs attribute theory, the paper constructs the first economic optimization model of time saving that is completely independent of any utility function. This model can also deal with the discrete, including the lexicographic preferences. Due to some data unavailable, the demand function of the time saving good can not be directly derived from the optimization model. Thus an indirect method is used to derive the demand function that has a better predictive power than two common econometric models of that dataset. An interesting hypothesis obtained from the result of the indirect method and need to be verified by more evidence is that we might find a âtime saving lawâ: the income elasticity of demand of time saving goods is approximately 1. Moreover, as a very basic human behavior, time saving can be generalized to other fundamental theories of Economics, especially the long-run growth theory. A further discussion indicates that based on the starting point of time saving, the two paradigms of Neo-classical and New Classical Economics could be united into one paradigm of saving time to increase utility or improving the level of division of labor to save time. Therefore, in the ultimate meaning, it is safe to conclude that Economics is a science of how to save time and time saving might be a milestone that will shift Economics from the pre-Copernican era of Astronomy to a modern era. |
| JEL: | A10 B23 C60 D11 |
| Date: | 2014–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2014:pzh519&r=upt |
| By: | Edi Karni (Johns Hopkins University); Marie-Louise Vierø (Queen's University) |
| Abstract: | In the wake of growing awareness, decision makers anticipate that they might become aware of material possibilities and ideas that, in their current state of ignorance, are unimaginable. This anticipation manifests itself in their choice behavior. This paper models this awareness of unawareness and axiomatizes a probabilistic sophisticated representation of beliefs about ignorance and subjective expected utility representation, in an enriched framework, that assigns utility to the unknown while maintaining, in both instances, the flavor of reverse Bayesianism of Karni and Vierø (2013, 2014). |
| Keywords: | Awareness, Unawareness, Ignorance, Reverse Bayesianism |
| JEL: | D8 D81 D83 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1322&r=upt |
| By: | Fossen, Frank M. (Free University of Berlin); Glocker, Daniela (CEP, London School of Economics) |
| Abstract: | Stated survey measures of risk preferences are increasingly being used in the literature, and they have been compared to revealed risk aversion primarily by means of experiments such as lottery choice tasks. In this paper, we investigate educational choice, which involves the comparison of risky future income paths and therefore depends on risk and time preferences. In contrast to experimental settings, educational choice is one of the most important economic decisions taken by individuals, and we observe actual choices in representative panel data. We estimate a structural microeconometric model to jointly reveal risk and time preferences based on educational choices, allowing for unobserved heterogeneity in the Arrow-Pratt risk aversion parameter. The probabilities of membership in the latent classes of persons with higher or lower risk aversion are modelled as functions of stated risk preferences elicited in the survey using standard questions. Two types are identified: A small group with high risk aversion and a large group with low risk aversion. The results indicate that persons who state that they are generally less willing to take risks in the survey tend to belong to the latent class with higher revealed risk aversion, which indicates consistency of stated and revealed risk preferences. The relevance of the distinction between the two types for educational choice is demonstrated by their distinct reactions to a simulated tax policy scenario. |
| Keywords: | educational choice, stated preferences, revealed preferences, risk aversion, time preference |
| JEL: | I20 D81 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7950&r=upt |
| By: | Aase, Knut K. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | Motivated by the problems of the conventional model in rationalizing market data, we derive the equilibrium interest rate and risk premiums using recursive utility in a continuous time model. We relax one restriction on dynamic utility, in that we do not assume irrelevance of past consumption for current marginal utility. One motive for this extension is added realism, another is that the state prices depend on past consumption. We use the stochastic maximum principle and forward/backward stochastic differential equations to derive two ordinally equivalent versions. The resulting equilibrium is consistent with reasonable values of the parameters of the utility functions when calibrated to market data, under various assumptions. |
| Keywords: | The equity premium puzzle; the risk-free rate puzzle; recursive utility; past dependence; the stochastic maximum principle; forward/backward stochastic differential equations |
| JEL: | D51 D53 D90 E21 G10 G12 |
| Date: | 2014–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2014_003&r=upt |
| By: | Jan-Erik Lönnqvist; Markku Verkasalo; Gari Walkowitz; Philipp C. Wichardt |
| Abstract: | This paper compares two prominent empirical measures of individual risk attitudes — the Holt and Laury (2002) lottery-choice task and the multi-item questionnaire advocated by Dohmen, Falk, Huffman, Schupp, Sunde and Wagner (2011) — with respect to (a) their within-subject stability over time (one year) and (b) their correlation with actual risk-taking behaviour in the lab — here the amount sent in a trust game (Berg, Dickaut, McCabe, 1995). As it turns out, the measures themselves are uncorrelated (both times) and, most importantly, only the questionnaire measure exhibits test-retest stability (? = .78), while virtually no such stability is found in the lottery-choice task. In addition, only the questionnaire measure shows the expected correlations with a Big Five personality measure and is correlated with actual risk-taking behaviour. The results suggest that the questionnaire is the more adequate measure of individual risk attitudes for the analysis of behaviour in economic (lab)experiments. Moreover, with respect to behaviour in the trust game, we find a high re-test stability of transfers (? = .70). This further supports the conjecture that trusting behaviour indeed has a component which itself is a stable individual characteristic (Glaeser, Laibson, Scheinkman and Soutter, 2000) |
| Keywords: | Risk Attitudes, Trust, Personality, Lab Experiments |
| JEL: | D81 C91 Z10 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1905&r=upt |
| By: | Kahsay, Goytom Abraha (Department of Food and Resource Economics, University of Copenhagen); Samahita, Margaret (Department of Economics, Lund University) |
| Abstract: | Pay-What-You-Want (PWYW) pricing schemes are becoming increasingly popular in a wide range of industries. We develop a model incorporating self-image into the buyer's utility function and introduce heterogeneity in consumption utility and image-sensitivity, which generates different purchase decisions and optimal prices across individuals. When a good is sold at a fixed price higher than a threshold value, a price that the individual thinks is fair, the adoption of PWYW increases his utility and hence results in a weakly higher purchase rate. When a good is sold at a fixed price lower than this threshold, however, PWYW can lead to a lower utility. This may result in a lower purchase rate and higher average price, in line with previously unexplained evidence from field experiments. Moreover, an increase in the threshold value decreases the buyer's utility and may further lower the purchase rate, possibly resulting in a further increase in purchase price. Using simple assumptions of quadratic self-image function and uniformly distributed individual preferences, we investigate the conditions under which PWYW yields higher total welfare. |
| Keywords: | pay-what-you-want; self-image; fairness; voluntary contribution |
| JEL: | D03 D11 D49 D64 D82 |
| Date: | 2014–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2014_006&r=upt |