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on Utility Models and Prospect Theory |
| By: | Zhou, Liting; Soetevent, Adriaan R. (Groningen University) |
| Abstract: | Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an expected utility framework. We then use K?oszegi and Rabin?s (2006, 2007) loss aversion model to answer the same question for the case where consumers have reference-dependent preferences. Largely independent of the adopted framework, we find that the optimal loss probability is sizable and for many commonly used parameterizations much closer to 1/2 than to 0. Previous studies have argued that granting insurers market power may incentivize them to engage in loss prevention activities, this to the benefit of consumers. Our results show that one should be cautious in doing so because there are conceivable instances where the insurer?s interests in modifying the loss probability to against those of consumers. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:14022-eef&r=upt |
| By: | Eric Danan; Thibault Gajdos; Brian Hill; Jean-Marc Tallon (Université de Cergy-Pontoise, THEMA; Université d’Aix-Marseille; GREGHEC, CNRS, HEC Paris; Paris School of Economics, CNRS) |
| Abstract: | We provide possibility results on the aggregation of beliefs and tastes for Monotone, Bernoullian and Archimedian preferences of Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci, and Siniscalchi (2011). We propose a new axiom, Unambiguous Pareto Dominance, which requires that if the unambiguous part of individuals’ preferences over a pair of acts agree, then society should follow them. We characterize the resulting social preferences and show that it is enough that individuals share a prior to allow non dictatorial aggregation. A further weakening of this axiom on common-taste acts, where cardinal preferences are identical, is also characterized. It gives rise to a set of relevant priors at the social level that can be any subset of the convex hull of the individuals’ sets of relevant priors. We then apply these general results to the Maxmin Expected Utility model, the Choquet Expected Utility model and the Smooth Ambiguity model. We end with a characterization of the aggregation of ambiguity attitudes. |
| Keywords: | Preference Aggregation, Social Choice, Uncertainty |
| JEL: | D71 D81 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2014-13&r=upt |
| By: | Paris, Quirino |
| Abstract: | Price risk in a mathematical programming framework has been confined for a long time to a constant risk aversion specification originally introduced by Freund in 1956. This paper extends the treatment of risk in a mathematical programming framework along the lines suggested by Meyer (1987) who demonstrated the equivalence of expected utility and a wide class of probability distributions that differ only by location and scale. This paper shows how to formulate a PMP specification that allows the estimation of the preference parameters and calibrates the model to the base data within an admissible small deviation. The PMP approach under generalized risk allows also the estimation of output supply elasticities. The approach is applied to a sample of large farms. |
| Keywords: | positive mathematical programming, generalized risk, output supply elasticities, Productivity Analysis, Research Methods/ Statistical Methods, Risk and Uncertainty, C6, |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ucdavw:181605&r=upt |
| By: | Temerario, Tiziana |
| Abstract: | In the real life groups, rather than individuals, take the most part of decisions. So that it is useful to study how groups take a decision in different strategic environments. This paper provides an overview of previous research about groups’ preferences over risk. I compare different experimental designs and examine their different results, focusing on how groups reach agreement in risky choices, compared with individuals. |
| Keywords: | Risk attitude; preferences; uncertainty; pairwise choice; review; groups; |
| JEL: | C91 C92 D81 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58079&r=upt |
| By: | Christoph Czichowsky; Walter Schachermayer; Junjian Yang |
| Abstract: | In a financial market with a continuous price process and proportional transaction costs we investigate the problem of utility maximization of terminal wealth. We give sufficient conditions for the existence of a shadow price process, i.e.~a least favorable frictionless market leading to the same optimal strategy and utility as in the original market under transaction costs. The crucial ingredients are the continuity of the price process and the hypothesis of "no unbounded profit with bounded risk". A counter-example reveals that these hypotheses cannot be relaxed. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1408.6065&r=upt |
| By: | Mark Dean; John McNeil |
| Abstract: | People may be uncertain about future preferences, leading to both a preference for flexibility in choice between menus and stochastic choice from menus. This paper describes an experimental test of preference uncertainty in a realeffort task. We observe subjects’ preferences over menus of work contracts, along with their choices of effort levels from those contracts. Our results suggest that preference uncertainty is important: 48% of our subjects exhibited strict preference for flexibility. A model of preference uncertainty (Ahn and Sarver (2013)) well describes the relationship between choice of and from menus: subjects willing to pay to include an option in a contact were more likely to use that option, and those that used an option were prepared to pay for it. We show that the introduction of an explicit stochastic element to the contract increased preference for flexibility, suggesting a causal role for uncertainty in menu preferences |
| Keywords: | # |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2014-10&r=upt |
| By: | Ashish R. Hota; Siddharth Garg; Shreyas Sundaram |
| Abstract: | We study a common-pool resource game where the resource experiences failure with a probability that grows with the aggregate investment in the resource. To capture decision making under such uncertainty, we model each player's risk preference according to the value function from prospect theory. We show the existence and uniqueness of a pure strategy Nash equilibrium when the players have arbitrary (potentially heterogeneous) risk preferences and under natural assumptions on the rate of return and failure probability of the resource. Greater competition, vis-a-vis the number of players, increases the failure probability at the Nash equilibrium, and we quantify this effect by obtaining (tight) upper bounds on the failure probability at the equilibrium for a large number of players with respect to the failure probability under investment by a single player. We further examine the effects of heterogeneity in risk preferences of the players with respect to two characteristics of the prospect-theoretic value function: loss aversion and diminishing sensitivity. Heterogeneity in attitudes towards loss aversion always leads to higher failure probability of the resource at the equilibrium when compared to the case where players have identical risk preferences, whereas there is no clear trend under heterogeneity in the diminishing sensitivity parameter. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1408.5951&r=upt |
| By: | Luo, Yulei |
| Abstract: | This paper provides a tractable continuous-time CARA-Gaussian framework to explore how the interactions of risk aversion and induced uncertainty due to informational frictions determine strategic consumption-portfolio rules, precautionary savings, and consumption dynamics in the presence of uninsurable labor income. Specifically, after solving the model explicitly, we explore the relative importance of the two types of induced uncertainty: (i) model uncertainty due to robustness and (ii) state uncertainty due to limited information-processing capacity as well as risk aversion in determining asset allocation, precautionary savings, and consumption dynamics. Finally, we discuss how the separation between risk aversion and intertemporal substitution affects strategic asset allocation and precautionary savings. |
| Keywords: | Robustness, Model Uncertainty, Rational Inattention, Uninsurable Labor Income, Strategic Asset Allocation, Precautionary Savings |
| JEL: | C6 C61 D8 D81 E2 |
| Date: | 2014–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58077&r=upt |
| By: | Duc Pham-Hi |
| Abstract: | Shadow "banks" are unidentified entities operating in the financial sphere, in different countries. Therefore their lending and borrowing activities must be based on some rationally determined interest rate. We make the hypothesis that it is determined by a Reinforced Learning process and try to model this behaviour alongside a classic CCLM/DSGE model. This is a follow-up from the presentation made at EcoMod July 2012 Seville "A Markov random model of Interbank Dynamics with Filtering and Learning". We go farther in the implementation of the model. Starting from a DSGE equilibrium, forward simulations are made using Sequential Monte Carlo and interacting particle systems technique. Loopbacks are made with RL equations implemented in a dozen of heterogenous agents as "shadow bankers", each with own set of utility preferences and learning capacities. Tentatively, it appears that in a interbank liquidity shortage environment, the "shadow entities" will split up into 2 categories according to risk aversion and learning speed and their own size. I will upload a first version of the paper in February. |
| Keywords: | Global EU, Modeling: new developments, Agent-based modeling |
| Date: | 2014–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:006356:6920&r=upt |
| By: | Akande, Emmanuel |
| Abstract: | This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy. |
| Keywords: | Real Business Cycle, Marginal Efficiency of Investment, productivity shocks, adjustment cost. |
| JEL: | E32 E37 F4 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52159&r=upt |
| By: | Alessio D'Amato (Università di Roma Tor Vergata, Italy.); Susanna Mancinelli (Dept. of Economics and Management. University of Ferrara, Italy.); Mariangela Zoli (Università di Roma Tor Vergata, Italy.) |
| Abstract: | Although waste minimization is considered a priority to face the waste problem, EU targets on waste prevention are very recent and most policy interventions have been oriented towards increasing recycling rates. As a result, signi?cant improvements in recycling performance have been attained, but there is still no clear evidence of increased waste prevention. A possible explanation of different trends in waste minimization and recycling rates may be found in the existence of interactions between the two waste related behaviors as well as between policies and households?personal motivations. The aim of the paper is to investigate both theoretically and empirically the impact of waste policies on recycling and prevention decisions of individuals. In the theoretical analysis, we model the role played by policies, intrinsic and extrinsic motivations in affecting waste decisions by explicitly allowing for complementarities or substitutabilities between recycling and waste reduction efforts in the utility function. Theoretical results suggest that policies, social norms and intrinsic motivations may affect recycling and prevention both directly and indirectly, through their reciprocal interactions. Theoretical predictions are then tested in a structural equation model, by using data for England from the Survey of Public Attitudes and Behaviours toward the Environment (Defra, 2010). Our empirical investigation shows that waste prevention and recycling activities reinforce each other, supporting the existence of complementarities between them. Nevertheless, when we consider also indirect effects among the involved variables, our results suggest that recycling policies may be not very effective in stimulating waste prevention whilst policy measures acting through intrinsic motivations may have stronger impacts. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:srt:wpaper:2114&r=upt |
| By: | Zoryana Olekseyuk; Hannah Schürenberg-Frosch |
| Abstract: | CGE models are a widely used and accepted technique for policy evaluation and impact analysis. The modeling technique is especially useful in the analysis of trade reforms, tax reforms, energy sector reform and development policy analysis. However, the results of such models are often argued to be sensitive to the choice of exogenous parameters such as elasticities. Apart from the elasticities of substitution between production factors in the production function, the so-called Armington elasticities which determine the substitutability between domestic goods and imports are often mentioned as one of the caveats of CGE models. McDaniel & Balisteri (2002), Schuerenberg-Frosch (2012), Siddig & Grethe (2012) and others show that the choice of the so-called Armington elasticities in the import demand function has a strong influence on the simulation results. Hence, it is very important to choose these elasticities in a sensible way. Unfortunately, many CGE papers are not very transparent concerning the choice of elasticities and the sensitivity of the results with respect to this choice. As e.g. Welsch (2008) points out ”In practice, the elasticities employed are frequently based on 'guestimation' or on estimates picked from the literature.” Armington (1969) and most CGE modelers use the constant elasticity of substitution (CES) function to model demand for domestic goods and imports. The Armington elasticity is hereby defined as the proportionate change in the ratio of quantities divided by the proportionate change in the marginal rate of substitution in demand between domestic and foreign goods. There exist a number of estimations for Armington elasticities and the results of these are frequently used in CGE studies. In this paper we argue that this strategy could lead to severely biased model results as the estimated elasticities might not be applicable to either the specific model or the country in question. The reasons we give for this argument are the following: Most of the existing studies provide results only for the U.S. Even among the estimated elasticities for the U.S. there is some variance found. More importantly, the very few studies for other countries[such as Gibson (2003), Welsch (2006, 2008)] find substantially differing results. But studies for other countries are very scarce. Thus, the often formulated argument that time-series studies find rather small elasticities might simply be driven by rather small elasticities in the specific U.S. case. Moreover, the higher elasticities for other countries (e.g. Gibson (2003)) can be explained by the fact that these studies are more recent and consider the effects of globalization, market integration and increasing competition, which lead to higher substitutability between domestic and foreign goods. Welsch (2006) argues that the Armington elasticities decrease over time due to intra-industry specialization among open economies. He also finds indications for this hypothesis in French data. Thus, elasticities from older studies (e.g. from the 1990s or earlier) might not be useful in models based on recent data as the trade pattern and trade motives might have undergone important changes since then. One result that emerges quite clear from the literature is that elasticities differ depending on the level of aggregation used in the data. It is uniformly found across most of the studies that elasticities tend to be higher the more disaggregate the underlying data is. Thus, a CGE modeler should use estimated elasticities from a study with the same level of sectoral disaggregation he uses in his model. However, the mentioned studies for the U.S. have a rather high level of disaggregation with 180-200 industries included. Most CGE studies are much more aggregate. Nonetheless, as McDaniel & Balisteri (2002) points out, authors simply calculate the average elasticity across subsectors and use this number for their aggregated sector. This might lead to an aggregation bias and thus to biased CGE results. Bloningen & Wilson (1999) investigate the determinants of Armington elasticities. In addition to sector-specific effects they also find country-specific determinants such as trade policy. This implies that the usage of elasticities from another country might be misleading. In addition, a comparison of estimated elasticities across countries is very difficult as the studies often not only differ in the country but also in the degree of disaggregation, the method applied, the time horizon, the data frequency and even the underlying structural model. This paper aims at providing additional insights in the aforementioned aspects by providing estimated elasticities based on recent data for a larger group of European countries. We focus here on elasticities for CGE modeling. Thus, we aggregate our data to the 2-digit level of NACE Rev.2 which is the degree of disaggregation also used in the EU and OECD SAMs and thus used in many CGE studies for these countries. We also derive our functional form from these models. Using cointegration analysis we estimate the first order condition resulting from cost minimization or utility maximization subject to the CES subutility function in imports and domestic goods. The results show a rather big variance across sectors and countries. The elasticities are between 0 and 3.7 what indicate a plausible magnitude comparable with the recent studies of Welsh (2006) and Saito (2004). Thus, there are significant differences between the minimum and maximum values for different countries. While for Austria and France the estimates are in the interval from 0.5 to 3.7 and 3.2 respectively, the values for Italy reach only a maximum of 1.6. These large differences are also observed for individual sectors. For instance, the elasticities for wood and cork products vary from 0.9 in France to 2.11 in Finland. The same can be observed for beverages (from 1.9 in Finland to 3.7 in Austria) and paper products (from 1.6 in France to 2.95 in Finland). Our results indicate higher values of Armington elasticities in comparison to the U.S. studies from the 1980s and 1990s despite a higher level of aggregation and the usage of annual data (i.e. a lower frequency). This confirms the statement that elasticities have increased since the 1980s due to increased internationalization of production and increasing competition on world markets. Moreover, this also confirms that higher values are found for countries outside the USA, just like the finding of Gibson (2003) for South Africa. However, the significant cross-country differences illustrate clearly that it is not acceptable to use estimated elasticities for another country when specifying a CGE model - which is very often done in practical CGE work. See above See above |
| Keywords: | NA, Trade issues, Trade issues |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5696&r=upt |