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on Utility Models and Prospect Theory |
| By: | Michał Krawczyk (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | This paper reports the results of a laboratory experiment in which probability weighting functions for risky gains were elicited non-parametrically in over 500 incentivized subjects. I compare probability weights for monetary rewards to two less fungible domains involving vouchers for different types of consumption, inducing stronger or weaker (positive) emotions. The level of stakes was also manipulated. I find that the probability to win monetary rewards is weighted almost linearly in the high stakes condition, the probability to win vouchers associated with positive affect is underweighted and the probability to win affect-poor vouchers is strongly underweighted. Substantial underweighting also prevails in all three domains in the low stakes condition. |
| Keywords: | prospect theory, probability weighting functions, fungibility, affect |
| JEL: | D81 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2014-15&r=upt |
| By: | Nicholas Bloom (Stanford) |
| Abstract: | Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP. |
| Keywords: | Uncertainty, risk, volatility, investment |
| JEL: | E2 E3 O3 O4 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:sip:dpaper:13-033&r=upt |
| By: | Raymond Fisman; Pamela Jakiela; Shachar Kariv |
| Abstract: | We measure the distributional preferences of a large, diverse sample of Americans by embedding modified dictator games that vary the relative price of redistribution in the American Life Panel. Subjects' choices are generally consistent with maximizing a (social) utility function. We decompose distributional preferences into two distinct components - fair-mindedness (tradeoffs between oneself and others) and equality-efficiency tradeoffs - by estimating constant elasticity of substitution utility functions at the individual level. Approximately equal numbers of Americans have equality-focused and efficiency-focused distributional preferences. After controlling for individual characteristics, our experimental measures of equality-efficiency tradeoffs predict the political decisions of our subjects. |
| JEL: | C91 D64 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20145&r=upt |
| By: | Hai-Chuan Xu (TJU); Wei Zhang (TJU); Xiong Xiong (TJU); Wei-Xing Zhou (ECUST) |
| Abstract: | We build a multiassets heterogeneous agents model with fundamentalists and chartists, who make investment decisions by maximizing the constant relative risk aversion utility function. We verify that the model can reproduce the main stylized facts in real markets, such as fat-tailed return distribution and long-term memory in volatility. Based on the calibrated model, we study the impacts of the key strategies' parameters on investors' wealth shares. We find that, as chartists' exponential moving average periods increase, their wealth shares also show an increasing trend. This means that higher memory length can help to improve their wealth shares. This effect saturates when the exponential moving average periods are sufficiently long. On the other hand, the mean reversion parameter has no obvious impacts on wealth shares of either type of traders. It suggests that no matter whether fundamentalists take moderate strategy or aggressive strategy on the mistake of stock prices, it will have no different impact on their wealth shares in the long run. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1405.5939&r=upt |
| By: | Andersson, Ola; Holm, Håkan J.; Tyran, Jean-Robert; Wengström, Erik |
| Abstract: | We study risk taking on behalf of others in an experiment on a large random sample. The decision makers in our experiment are facing high-powered incentives to increase the risk on behalf of others through hedged compensation contracts or with tournament incentives. Compared to a baseline condition without such incentives, we find that the decision makers respond strongly to these incentives that result in an increased risk exposure of others. However, we find that the increase in risk taking is mitigated by altruistic preferences and pro-social personality traits. |
| Keywords: | Competition; Hedging; Incentives; Risk Taking; Social Preferences |
| JEL: | C72 C90 D30 D81 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9743&r=upt |
| By: | Minchuk, Yizhaq; Sela, Aner |
| Abstract: | We study all-pay auctions with multiple prizes. The players have the same value for all the certain prizes except for one uncertain prize for which each player has a private value. We characterize the equilibrium strategy and show that if the number of prizes is smaller than the number of players, independent of the ranking of the uncertain prize, a player's probability to win as well as his expected utility increases in his value for this prize. We demonstrate that a stochastic dominance relation between two distribution functions of the players' private values may increase but also even decrease the players' ex-ante expected utility as well the players' expected total effort. Also, increasing the number of prizes may decrease the players' ex-ante expected utility. Thus, we may conclude that a larger number of prizes does not necessarily benefit the players in a contest. |
| Keywords: | All-pay auctions; contests; uncertain prizes |
| JEL: | D44 D82 J31 J41 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9908&r=upt |
| By: | Herweg, Fabian; Karle, Heiko; Müller, Daniel |
| Abstract: | We consider a simple trading relationship between an expectation-based loss-averse buyer and profit-maximizing sellers. When writing a long-term contract the parties have to rely on renegotiations in order to ensure materially efficient trade ex post. The type of the concluded long-term contract affects the buyer's expectations regarding the outcome of renegotiation. If the buyer expects renegotiation always to take place, the parties are always able to implement the materially efficient good ex post. It can be optimal for the buyer, however, to expect that renegotiation does not take place. In this case, a good of too high quality or too low quality is traded ex post. Based on the buyer's expectation management, our theory provides a rationale for ``employment contracts'' in the absence of non-contractible investments. Moreover, in an extension with non-contractible investments, we show that loss aversion can reduce the hold-up problem. |
| Keywords: | Behavioral Contract Theory; Expectation-Based Loss Aversion; Incomplete Contracts; Renegotiation |
| JEL: | C78 D03 D86 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9874&r=upt |
| By: | Fafchamps, Marcel; Kebede, Bereket; Zizzo, Daniel John |
| Abstract: | The paper reports the result of an experimental game on asset integration and risk taking. We find evidence that winnings in earlier rounds affect risk taking in subsequent rounds, but no evidence that real life wealth outside the experiment affects risk taking. We find some evidence of imitation of the risk taking behavior of others that is distinct from learning. Controlling for past winnings, participants who receive a low endowment in a round engage in more risk taking. We also test a `keeping-up-with-the-Joneses' hypothesis and find some evidence that subjects seek to keep up with winners. Taken together, the evidence is consistent with risk taking tracking a reference point that is affected by social comparisons. |
| Keywords: | asset integration; prospect theory; risk; social comparisons |
| JEL: | C91 D12 D81 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9714&r=upt |
| By: | Filippin, Antonio (University of Milan); Crosetto, Paolo (Université de Grenoble) |
| Abstract: | This paper reconsiders the wide agreement that females are more risk averse than males providing a leap forward in its understanding. Thoroughly surveying the experimental literature we first find that gender differences are less ubiquitous than usually depicted. Gathering the microdata of an even larger sample of Holt and Laury replications we boost the statistical power of the test and show that the magnitude of gender differences, although significant, is economically unimportant. We conclude that gender differences systematically correlate with the features of the elicitation method used and in particular the availability of a safe option and fixed probabilities. |
| Keywords: | gender, risk, survey |
| JEL: | C81 C91 D81 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8184&r=upt |
| By: | Olivier Bonroy (GAEL - Economie Appliquée de Grenoble - Institut national de la recherche agronomique (INRA) : UR1215 - Université Pierre-Mendès-France - Grenoble II); Stéphane Lemarié (GAEL - Economie Appliquée de Grenoble - Institut national de la recherche agronomique (INRA) : UR1215 - Université Pierre-Mendès-France - Grenoble II); Jean-Philippe Tropeano (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 existing literature on credence goods and expert services has overlooked the importance of risk aversion. In this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk-averse consumers. Our results show that the presence of risk aversion reduces the expert's incentive to invest in diagnosis and may thus lead to consumers' mistreatment. |
| Keywords: | Credence goods; Expert services; Risk aversion |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00976890&r=upt |
| By: | Kondor, Péter; Vayanos, Dimitri |
| Abstract: | We develop a dynamic model of liquidity provision, in which hedgers can trade multiple risky assets with arbitrageurs. We compute the equilibrium in closed form when arbitrageurs' utility over consumption is logarithmic or risk-neutral with a non-negativity constraint. Liquidity is increasing in arbitrageur wealth, while asset volatilities, correlations, and expected returns are hump-shaped. Liquidity is a priced risk factor: assets that suffer the most when liquidity decreases, e.g., those with volatile cashflows or in high supply by hedgers, offer the highest expected returns. When hedging needs are strong, arbitrageurs can choose to provide less liquidity even though liquidity provision is more profitable. |
| Keywords: | Arbitrage capital; Asset pricing; Liquidity; Liquidity risk; Risk-sharing |
| JEL: | D53 G01 G11 G12 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9885&r=upt |
| By: | P. Mathiou (Department of Agricultural Economics and Development Agricultural University of Athens, Greece); Stelios Rozakis (Department of Agricultural Economics and Rural Development, Agricultural University of Athens, Iera Odos 75, Athens 11855, Greece); Rafal Pudelko ("Department of Agrometeorology and Applied Informatics, Institute of Soil Sciences and Plant Cultivation (IUNG), State Research Institute, Czartoryskich 8, 24-100 Pulawy, Poland"); A. Faber ("Department of Agrometeorology and Applied Informatics, Institute of Soil Sciences and Plant Cultivation (IUNG), State Research Institute, Czartoryskich 8, 24-100 Pulawy, Poland"); A. Petsakos (Economie Publique, Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2), Institut National de la Recherche Agronomique (INRA), France) |
| Abstract: | Governments extensively use price support instruments to the energy industry combined with direct support for cultivating perennial crops to promote conversion of solid biomass to energy, in order to meet the goals of energy independence and mitigation of the greenhouse effect. In this paper, focusing on less fertile land classes in Poland, biomass supply is determined for a range of hypothetical prices and policy scenarios using bottom-up sector modelling. Risk-neutral and risk-averse farm-based models are run for examining willow and miscanthus adoption by Polish farmers at the municipal level. |
| Keywords: | Willow, Miscanthus, Mathematical Programming, Utility Function, Biomass Supply, Spatial allocation |
| JEL: | C6 Q16 Q41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:aua:wpaper:2014-3&r=upt |
| By: | Heinz Welsch (University of Oldenburg, Department of Economics); Susana Ferreira (University of Georiga) |
| Abstract: | Recent years have seen a sharp increase in the use of subjective well-being data in environmental economics. This article discusses the conceptual underpinnings of using such data as a tool for preference elicitation and non-market valuation. Given the connection of those data to the notion of experienced utility, we refer to this approach as the experienced preference method and discuss recent methodological advances and applications of the approach to subject areas not previously reviewed. In addition, we discuss insights concerning environmental behavior that can be gained with the help of subjective well-being data. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:old:dpaper:367&r=upt |
| By: | Olivetti, Claudia; Patacchini, Eleonora; Zenou, Yves |
| Abstract: | This paper explores a novel mechanism of gender identity formation. Specifically, we explore how the work behavior of a teenager's own mother, as well as that of her friends' mothers, affect her work decisions in adulthood. The first mechanism is commonly included in economic models. The second, which in social psychology is also emphasized as an important factor in gender identity formation, has so far been overlooked. Accordingly, our key theoretical innovation is how the utility function is modeled. It is assumed that an adult woman's work decisions are influenced by her own mother's choices as well as her friends' mothers' choices when she was a teenager, and the interaction between the two. The empirical salience of this behavioral model is tested using a network model specification together with the longitudinal structure of the AddHealth data set. We find that both intergenerational channels positively affect a woman's work hours in adulthood, but the cross effect is negative, indicating the existence of cultural substitutability. That is, the mother's role model effect is larger the more distant she is (in terms of working hours) from the friends' mothers. |
| Keywords: | gender identity; Intergenerational transmission; labor force participation; social networks |
| JEL: | J22 Z13 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9712&r=upt |
| By: | Leonardo Bursztyn; Michael Callen; Bruno Ferman; Ali Hasanain; Noam Yuchtman |
| Abstract: | We develop an indirect, revealed preference method of eliciting attitudes and apply it in an experiment in Pakistan designed to understand the expression of anti-American views. Following the completion of a personality survey, we offer subjects a bonus payment for completing the survey. We find that around one-quarter of subjects forgo a 100 Rupee payment (roughly one-fifth of a day's wage) to avoid anonymously checking a box indicating gratitude toward the United States government for providing funds. We experimentally vary the identity of the funder, the payment size, and subjects' expectations of privacy, and find that rejection of the payment is responsive to all of these treatments. Rejection of the U.S. government bonus payment is an indirect measure of anti-American attitudes. This approach mitigates concerns with experimenter demand, social desirability, and other biases, which can distort reported attitudes. We discuss and present suggestive evidence of the advantages of our methodology. |
| JEL: | C90 P16 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20153&r=upt |
| By: | Yan, Jin; Yoo, Hong Il |
| Abstract: | The rank-ordered logit model's coefficients often vary significantly with the depth of rankings used in the estimation process. The common interpretation of the unstable coefficients across ranks is that survey respondents state their more and less preferred alternatives in an incoherent manner. We point out another source of the same empirical regularity: stochastic misspecification of the random utility function. An example is provided to show how the well-known symptoms of incoherent ranking behavior can result from stochastic misspecification, followed by Monte Carlo evidence. Our finding implies that the empirical regularity can be addressed by the development of robust estimation methods. |
| Keywords: | rank-ordered logit, exploded logit, ranking, qualitative response,stated preference |
| JEL: | C25 C52 C81 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56285&r=upt |
| By: | Bo Sandemann Rasmussen (Department of Economics and Business, Aarhus University, Denmark; Department of Economics and Business, Aarhus University, Denmark) |
| Abstract: | In a two-type Stiglitz (1982) model of optimal non-linear taxation it is shown that when the utility function relating to consumption is logaritmic the shadow price of the incentive constraint relating to the optimal tax problem exactly equals the Gini coefficient of the secondbest optimal income distribution of a utilitarian government. In this sense the optimal degree of income redistribution is determined by the severity of the incentive problem facing the policy-maker. Extensions of the benchmark model to allow for more general functional forms of the utility function and for more than two types of workers reveal that also in these cases the desired degree of income redistribution is positively correlated with the shadow prices of the incentive constraints. |
| JEL: | H21 H23 H24 |
| Date: | 2014–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2014-15&r=upt |
| By: | Natsuka Tokumaru |
| Abstract: | Economic experiments have shown that human incentives are not only limited to the profit-maximizing principle but also motivated by fairness. Those studies presuppose that individuals commit to fixed value systems and that experimental institutions invoke fairness ideals. This paper shows that participants strategically select fairness ideals advantageous for self-distribution. Participants whose relative earnings are higher than those of their pairs adhere to a liberalist fairness ideal, whereas those with lower relative earnings prefer an egalitarian distribution of money. This reflects that individuals commit opportunistic behavior as a result of resolving a cognitive dissonance between material utility and fairness. |
| Keywords: | Economic Experiment, Fairness Ideals, Cognitive Dissonance, Hidden Selfishness, Opportunistic Behavior |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:kue:dpaper:e-14-004&r=upt |
| By: | Blanchet, Adrien; Mossay, Pascal; Santambrogio, Filippo |
| Abstract: | We extend Beckmann’s spatial model of social interactions to the case of a two-dimensional spatial economy involving a large class of utility functions, accessing costs, and space-dependent amenities. We show that spatial equilibria derive from a potential functional. By proving the existence of a minimiser of the functional, we obtain that of a spatial equilibrium. Under mild conditions on the primitives of the economy, the functional is shown to satisfy displacement convexity, a concept used in the theory of optimal transportation. This provides a variational characterisation of spatial equilibria. Moreover, the strict displacement convexity of the functional ensures the uniqueness of spatial equilibrium. Also, the spatial symmetry of equilibrium is derived from that of the spatial primitives of the economy. Several examples illustrate the scope of our results. In particular, the emergence of multiple of equilibria in the circular economy is interpreted as a lack of convexity of the problem. |
| Keywords: | social interaction, spatial equilibria, multiple cities, optimal transportation, displacement convexity. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28212&r=upt |