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on Utility Models and Prospect Theory |
| By: | Graddy, Kathryn; Loewenstein, Lara; Mei, Jianping; Moses, Mike; Pownall, Rachel A J |
| Abstract: | We find evidence for the behavioral biases of anchoring and loss aversion. We find that anchoring is more important for items that are resold quickly, and we find that the effect of loss aversion increases with the time that a painting is held. The evidence in favor of anchoring and loss aversion with this large dataset validates previous results and adds to the empirical evidence a finding of increasing loss aversion with the length a painting is held. We do not find evidence that investors can take advantage of these behavioral biases. |
| Keywords: | anchoring; art auctions; endowment effect; loss aversion |
| JEL: | D03 D44 Z11 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10048&r=upt |
| By: | Astrid Gamba (Department of Economics, Management and Statistics, University of Milan-Bicocca); Elena Manzoni (Department of Economics, Management and Statistics, University of Milan-Bicocca); Luca Stanca (Department of Economics, Management and Statistics, University of Milan-Bicocca) |
| Abstract: | This paper studies the effects of social comparison on risk taking be- havior. In our framework, decision makers evaluate the consequences of their choices as changes with respect to both their own and their peers' conditions. We test experimentally whether different positions in the social ranking determine different risk attitudes. Subjects interact in a simulated workplace environment, where they receive possibly different wages as compensation for effort and then undertake a risky decision that may give them an extra gain. We find that social comparison matters for risk attitudes. In addition, risk aversion decreases with the size of social gains. As a consequence, subjects are less risk averse in social loss than in small social gain, whereas their risk attitudes do not differ between social loss and large social gain. |
| Keywords: | Social comparison, risk aversion, interdependent preferences, reference point |
| Date: | 2014–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-031&r=upt |
| By: | Stifel, David; Razafimanantena,Tiaray; Rakotomanana, Faly |
| Abstract: | We use Arndt and Simler.s (2010) utility-consistent approach to calculating poverty lines to analyse poverty in Madagascar in 2001, 2005 and 2010. Because two major political crises occurred between the survey periods, the snapshots of national poverty ri |
| Keywords: | poverty measurement, utility-consistent poverty lines, inequality, Madagascar |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2014-122&r=upt |
| By: | Matthew Lorig |
| Abstract: | We consider a general local-stochastic volatility model and an investor with exponential utility. For a European-style contingent claim, whose payoff may depend on either a traded or non-traded asset, we derive an explicit approximation for both the buyer's and seller's indifference price. For European calls on a traded asset, we translate indifference prices into an explicit approximation of the buyer's and seller's implied volatility surface. For European claims on a non-traded asset, we establish rigorous error bounds for the indifference price approximation. We also introduce the concept of an "implied Sharpe ratio" and derive explicit approximations for this quantity. Like implied volatility, the implied Sharpe ratio can be viewed as a measure of an option's value. The advantage of the implied Sharpe ratio is that, unlike implied volatility, it takes into account an investor's preferences and his alternative investment possibilities. We implement our indifference price, implied volatility and implied Sharpe ratio approximations in two examples. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1412.5520&r=upt |
| By: | Holte, J.H.;; Sivey, P.;; Abelsen, B.;; Olsen, J.A.; |
| Abstract: | This paper tests for the existence of nonlinearity and reference-dependence in income preferences for general practitioners. Confirming the theory of reference dependent utility, within the context of a discrete-choice experiment, we find that losses loom larger than gains in income for Norwegian GPs, a 10% decrease in income is valued approximately equal to a 30% gain. Our results are validated by comparison with equivalent contingent valuation values for marginal willingness to pay and marginal willingness to accept compensation for changes in job characteristics. Physicians’ income preferences determine the effectiveness of ‘pay for performance’ and other incentive schemes. Our results may explain the relative ineffectiveness of financial incentive schemes that rely on increasing physicians’ incomes. |
| Keywords: | general practitioners; income; reference-dependence; discrete choice experiment; |
| JEL: | I11 J44 J31 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:yor:hectdg:14/12&r=upt |
| By: | Kwan, Yum K.; Leung, Charles Ka Yui; Dong, Jinyue |
| Abstract: | Eight consumption-based asset pricing models are developed, estimated and compared their capacities in accounting for the asset markets in Hong Kong. Results based on conventional metrics or recently developed econometric techniques deliver similar results: introducing housing into the consumption-based models does not always improve the models’ performance; how it is introduced matters. Recursive utility model and its housing-augmented variant, which emphasize the importance of early resolution of uncertainty and long term risk, outperform alternative models in forecasting stock returns. Collateral constraint model outperforms in predicting housing return, suggesting the importance of imperfect capital market in the housing market. |
| Keywords: | Consumption-based asset pricing model; Recursive utility; Habit formation; Consumption growth risk; Composition risk; Labor income risk; Long-run risk; Collateral constraint; Hansen-Jagannathan distance; Model confidence sets. |
| JEL: | E20 G12 R30 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:60513&r=upt |
| By: | Kollmann, Robert |
| Abstract: | Standard macro models cannot explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle. I show that this result is highly sensitive to the structure of financial markets. When just a bond can be traded internationally, then long-run risk generates insufficient exchange rate volatility. A longrun risk model with recursive-preferences in which all agents trade in complete global financial markets can generate realistic exchange rate volatility; however, I show that this entails huge international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursive-preferences model in which only a small fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, generates realistic exchange rate and external balance volatility |
| Keywords: | complete financial markets; exchange rate; financial frictions; international risk sharing; long-run risk; recursive preferences |
| JEL: | F31 F36 F41 F43 F44 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10232&r=upt |
| By: | Dagsvik, John K. (Research Department, Statistics Norway, and the Frisch Centre of Economic Research); Jia, Zhiyang (Statistics Norway) |
| Abstract: | This paper discusses aspects of a framework for modeling labor supply where the notion of job choice is fundamental. In this framework, workers are assumed to have preferences over latent job opportunities belonging to worker-specific choice sets from which they choose their preferred job. The observed hours of work and wage is interpreted as the job-specific hours and wage of the chosen job. The main contribution of this paper is an analysis of the identification problem of this framework under various conditions, when conventional cross-section micro-data are applied. <p> The modeling framework is applied to analyze labor supply behavior for married/cohabiting couples using Norwegian micro data. Specifically, we estimate two model versions with in the general framework. Based on the empirical results, we discuss further qualitative properties of the model versions. Finally, we apply the preferred model version to conduct a simulation experiment of a counterfactual policy reforms. |
| Keywords: | Labor supply; non-pecuniary job attributes; latent choice sets; random utility models; identification |
| JEL: | C51 J22 |
| Date: | 2014–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2014_022&r=upt |
| By: | Breaban, A.; Noussair, C.N. (Tilburg University, Center For Economic Research) |
| Abstract: | Abstract: We report results from an asset market experiment, in which we investigate how the time path of the fundamental value trajectory affects the level of adherence to fundamentals. In contrast to previous experiments with long-lived assets, there is a phase in which fundamental values are constant before the onset of a trend. The trend is either increasing or decreasing, depending on the treatment. We compare the level of mispricing between the decreasing and increasing fundamental value trajectories. Before the market begins, risk aversion, loss aversion, and cognitive reflection protocols are administered to traders. We find evidence for closer adherence to fundamental values when the trajectory follows a decreasing, than when it has an increasing, trend. Greater average risk aversion on the part of traders in the market predicts lower market prices. The greater the level of loss aversion of the trader cohort, the lower the quantity traded. The greater the average cognitive reflection test score, the smaller the differences between market prices and fundamental values. The variation between groups in risk aversion, loss aversion, and CRT score, explains an additional 44% and 18% of the cohort-level variation in price level and mispricing, respectively, compared to a model including only treatment, experience level, and subject pool. |
| Keywords: | Bubble; Experiment; Risk Aversion; Loss Aversion; Cognitive Reflection |
| JEL: | C9 G12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:3103cf69-bc46-42bf-a9a5-e5a7dfbfbd35&r=upt |
| By: | Julio Backhoff; Ulrich Horst |
| Abstract: | We analyze conditional optimization problems arising in discrete time Principal-Agent problems of delegated portfolio optimization. Applying tools from Conditional Analysis to the case of linear contracts we show that most results known in the literature for very specific instances of the problem carry over to translation invariant and time-consistent utility functions in very general probabilistic settings. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1412.4698&r=upt |
| By: | Koshevoy, G.A.; Suzuki, T. (Tilburg University, Center For Economic Research); Talman, A.J.J. (Tilburg University, Center For Economic Research) |
| Abstract: | A cooperative game with non-transferable utility (NTU-game) consists of a collection of payoffsets for the subsets of a nite set of players, for which it has to be determined how much payof each player must receive. The core of an NTU-game consists of all payoffvectors that are in the payoff set of the coalition of all players and cannot be improved upon by any coalition of players. For cooperative games with transferable utility (TU-games) the notion of convexity was introduced to guarantee that the Shapley value, being the average of all marginal vectors of the game, is an element of the core. Convexity of a TU-game is equivalent to supermodularity of the characteristic function underlying the game. In this paper we introduce the concept of supermodularity for NTU-games. Super-modularity for NTU-games is weaker than other existing types of convexity. Under super-modularity of an NTU-game it is shown that all appropriately dened marginal vectors of the game are elements of the core. As solution concept for NTU-games we propose a set of solutions that is determined by the average of all marginal vectors of the game. For TU-games the solution set coincides with the Shapley value of the game. Also conditions are stated under which the solution set is a subset of the core and is the set of bargaining solutions of a corresponding bargaining problem. |
| Keywords: | core; shapley value; convexity; supermodularity; marginal vector |
| JEL: | C71 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:23321d39-5b97-4a09-b120-60626df51653&r=upt |
| By: | Holden, Stein (Centre for Land Tenure Studies, Norwegian University of Life Sciences); Bezu, Sosina (Centre for Land Tenure Studies, Norwegian University of Life Sciences) |
| Abstract: | We used a field experiment to investigate exchange asymmetries in productive assets among poor rural respondents in Ethiopia. Farmers were randomly allocated two types of productive assets or cash, with a choice to keep the productive asset (cash) or exchange it for cash (productive asset). To introduce productive asset variation, a durable asset (farm tool) and a short-term input (fertilizer) were randomly allocated and combined with a random amount of cash. Loss aversion was proxied with a separate experiment and was used to assess the importance of endowment effect theory to explain exchange asymmetries. A greater exchange asymmetry was found for the more popular tool than for fertilizer. Loss aversion could explain a small but significant part of the exchange asymmetry in tools, but experience did not reduce the exchange asymmetry. Compared to the female respondents, the male respondents exhibited greater exchange asymmetries and more non-linear price responses with declining elasticities as prices increased. Key words: exchange asymmetry, endowment effect, loss aversion, factor markets, productive assets, input demand elasticities, field experiment. JEL codes: |
| Keywords: | exchange asymmetry; endowment effect; loss aversion; factor markets; productive assets; input demand elasticities; field experiment. |
| JEL: | D03 D51 O13 Q12 |
| Date: | 2014–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nlsclt:2014_013&r=upt |
| By: | Pikulina, E.S. (Tilburg University, School of Economics and Management) |
| Abstract: | While economists believe that monetary incentives provide the most powerful motivation for individuals to undertake an activity, major schools in psychology and sociology emphasize the motives coming from within the individual and from the personal and cultural differences among individuals. This dissertation employs both approaches to investigate the effect of monetary incentives, behavioral biases (such as overconfidence), and culture on individuals' decision-making. So it can be divided in two parts. The first part of this dissertation explores the effect of different compensation schemes on risk-taking behavior and performance of proprietary traders and mutual fund managers, using an experimental setup and historical data. The second part investigates the role of overconfidence in effort and investment provision and the role of cultural background in risk-taking in experimental setting. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:3473e2b3-2425-449c-95e2-41e152e0ea6e&r=upt |
| By: | Catia Batista; Janis Umblijs |
| Abstract: | How do risk preferences affect migrant remittance behaviour? Examination of this relationship has only begun to be explored. Using a tailored representative survey of 1500 immigrants in the Greater Dublin Area, Ireland, we find a positive and significant relationship between risk aversion and migrant remittances. Risk-averse individuals are more likely to send remittances home and are, on average, likely to remit a higher amount, after controlling for a broad range of individual and group characteristics. The evidence we obtain is consistent with a “purchase of self-insurance” motive to remit in that we also find support for more remittances being sent by risk-averse immigrants who face higher wage risks and to individuals with more financial resources. JEL codes: D81, F22, F24, J15, J61 |
| Keywords: | Migration, Risk Aversion, Remittances, Self-Insurance |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:novaf:wp1402&r=upt |
| By: | Francesco Busato; Francesco Giuli; Enrico Marchetti |
| Abstract: | This paper presents a simple Overlapping Generation Model (OLG), aug-mented with Prospect Theory elements in the spirit of al-Nowaihi and Dhami (2007). Themodel tackle several open questions in the analysis of tax evasion and compliance decisions. In particular, the paper presents a new and complementary approach to address tax compliance decision in a OLG economy with behavioral components. Our main results are the following: there exists an equilibrium with a tax evasion level which can be coherent with the empirical estimates for the US economy; for our calibrations we ¯nd that the relationship between the tax rate and the evasion rate is a positive one (i.e., the model offers a solution to the Yitzhaki puzzle); we can highlight the role played in the context of tax evasion by an essential component of Prospect Theory, the framing effect, which was precluded to simple individual choice models. |
| Keywords: | Tax evasion, OLG models, Prospect theory |
| JEL: | E21 D03 D81 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0196&r=upt |
| By: | Comerford, David |
| Abstract: | The standard approach to the economics of climate change, which has its best known implementation in Nordhaus's DICE and RICE models (well described in Nordhaus's 2008 book, A Question of Balance) is not well equipped to deal with the possibility of catastrophe, since we are unable to evaluate a risk averse representative agent's expected utility when there is any signi cant probability of zero consumption. Whilst other authors attempt to develop new tools with which to address these problems, the simple solution proposed in this paper is to ask a question that the currently available tools of climate change economics are capable of answering. Rather than having agents optimally choosing a path (that differs from the recommendations of climate scientists) within models which cannot capture the essential features of the problem, I argue that economic models should be used to determine the savings and investment paths which implement climate targets that have been suggested in the physical science literature. |
| Keywords: | Climate Change, Catastrophe, Optimal Policy, Alternative Energy Investment, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:438&r=upt |
| By: | artige, LIONEL (HEC, University of Liège, B-4000 Liège, Belgium); CAVENAILE, Laurent (New York University); PESTIEAU, Pierre (HEC, University of Liège, B-4000 Liège, Belgium; Université catholique de Louvain, CORE, Belgium) |
| Abstract: | This paper analyzes and compares the macroeconomic performance of defined-benefit and defined-contribution pay-as-you-go pension systems when population ages. When the fertility rate decreases or longevity rises, it is shown that a shift from defined benefit (defined total benefit or defined annuities) to defined contribution always results in higher per-capita income and life-cycle welfare at the steady state. All results are derived with general production and utility functions. |
| Keywords: | aging, defined benefit, defined contribution, fertility, longevity, PAYG pension |
| JEL: | E13 H55 J13 J26 |
| Date: | 2014–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2014033&r=upt |
| By: | Jens Gudmundsson |
| Abstract: | We study two-sided ("marriage") and general pairing ("roommate") problems. We introduce "sequences," lists of matchings that are repeated in order. Stable sequences are natural extensions of stable matchings; case in point, we show that a sequence of stable matchings is stable. In addition, stable sequences can provide solutions to problems for which stable matchings do not exist. In a sense, they allow us to "balance" the interest of the agents at different matchings. In this way, sequences can be superior to matchings in terms of welfare and fairness. A seminal result due to Roth (1982, Math Oper Res 7(4), 617â628) is that no strategy-proof rule always selects stable matchings. In contrast, we show that there is a weakly group sd-strategy-proof rule that selects stable sequences. We call it the Compromises and Rewards rule, CR. We find that stronger incentive properties are incompatible with much weaker stability properties and vice versa. The CR rule satisfies two fairness axioms: anonymity and side-neutrality. For the general problem, the Generalized CR rule is sd-5-stable (cannot be blocked by groups of five or fewer agents), weakly sd-strategy-proof, and anonymous. In addition, the Extended All-Proposing Deferred Acceptance rule is sd-stable, anonymous, and individually rational at all times on a restricted domain. We provide a condition under which our results still hold if agents have cardinal preferences and compare sequences using "expected utility." |
| JEL: | C62 D02 D60 |
| Date: | 2014–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2014:pgu351&r=upt |
| By: | Mikolaj Czajkowski (University of Warsaw, Faculty of Economic Sciences, Poland); Nick Hanley (School of Geography and Sustainable Development, University of St. Andrews); Karine Nyborg (University of Oslo, Department of Economics, Norway) |
| Abstract: | This paper considers the role which selfish, moral and social incentives and pressures play in explaining the extent to which stated choices over pro-environment behaviours vary across individuals. The empirical context is choices over household waste contracts and recycling actions in Poland. A theoretical model is used to show how cost-based motives and the desire for a positive self- and social image combine to determine the utility from alternative choices of recycling behaviour. We then describe a discrete choice experiment designed to empirically investigate the effects such drivers have on stated choices. Using a latent class model, we distinguish three types of individual who are described as duty-orientated recyclers, budget recyclers and homo oeconomicus. These groups vary in their preferences for how frequently waste is collected, and the number of categories into which household waste must be recycled. Our results have implications for the design of future policies aimed at improving participation in recycling schemes. |
| JEL: | D22 F18 Q41 Q52 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:2014-03&r=upt |
| By: | Kleppe, J. (Tilburg University, Center For Economic Research); Reijnierse, J.H. (Tilburg University, Center For Economic Research); Sudhölter, P. |
| Abstract: | If the excesses of the coalitions in a transferable utility game are weighted, then we show that the arising weighted modifications of the well-known (pre)nucleolus and (pre)kernel satisfy the equal treatment property if and only if the weight system is symmetric in the sense that the weight of a subcoalition of a grand coalition may only depend on the grand coalition and the size of the subcoalition. Hence, the symmetrically weighted versions of the (pre)nucleolus and the (pre)kernel are symmetric, i.e., invariant under symmetries of a game. They may, however, violate anonymity, i.e., they may depend on the names of the players. E.g., a symmetrically weighted nucleolus may assign the classical nucleolus to one game and the per capita nucleolus to another game. We generalize Sobolev’s axiomatization of the prenucleolus and its modification for the nucleolus as well as Peleg’s axiomatization of the prekernel to the symmetrically weighted versions. Only the reduced games have to be replaced by suitably modified reduced games whose definitions may depend on the weight system. Moreover, it is shown that a solution may only satisfy the mentioned sets of modified axioms if the weight system is symmetric. |
| Keywords: | TU game · Nucleolus · Kernel |
| JEL: | C71 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:98930f2c-667e-4a4a-b76e-85dd1d783896&r=upt |