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on Utility Models and Prospect Theory |
| By: | Dominiak, Adam; Duersch, Peter |
| Abstract: | Traditionally, real experiments testing subjective expected utility theory take for granted that subjects view the Ellsberg task as a one-person decision problem. We challenge this view: Instead of seeing the Ellsberg task as a one-person decision problem, it can be perceived as a two-player game. One player chooses among the bets. The second player determines the distribution of balls in the Ellsberg urn. The Nash equilibrium predictions of this game depend on the payoff of the second player, with the game ranging from a zero-sum one to a coordination game. Meanwhile, the predictions by ambiguity aversion models remain unchanged. Both situations are implemented experimentally and yield different results, in line with the game-theoretic prediction. Additionally, the standard scenario (without explicit mention of how the distribution is determined) leads to results similar to the zero-sum game, suggesting that subjects view the standard Ellsberg experiment as a game against the experimenter. |
| Keywords: | Ellsberg task; experiment; zero-sum game; coordination game; ambiguity; uncertainty averse preferences |
| Date: | 2015–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0592&r=upt |
| By: | Philip Monin (Office of Financial Research); Thaleia Zariphopoulou (The University of Texas at Austin) |
| Abstract: | The theory of portfolio choice holds that investors balance risk and reward in their investment decisions. We explore the relationship between investors' attitudes towards taking risk and their objectives for managing the risk they take on. Working in a classical theoretical model, we calculate the distribution and density functions of an investor's optimal wealth process and prove new mathematical results for these functions under general risk preferences. By applying our results to a constant relative risk aversion investor who has a targeted value at risk or expected shortfall at a given future time, we are able to infer the investor's risk preferences and prescribe how to invest to achieve the desired goal. Then, drawing analogies to the option greeks, we define and derive closed-form expressions for "portfolio greeks," which measure the sensitivities of an investor's optimal wealth to changes in the cumulative excess stock return, time, and market parameters. Like option greeks, portfolio greeks can be used in the risk management of investors' portfolios. |
| Keywords: | expected utility, Merton problem, value at risk (VaR), expected shortfall, portfolio greeks |
| Date: | 2014–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:discus:14-01&r=upt |
| By: | Benoît Carmichael; Gilles Boevi Koumou; Kevin Moran |
| Abstract: | This paper extends the use of Rao(1982b)’s Quadratic Entropy (RQE) to modern portfolio theory. It argues that the RQE of a portfolio is a valid, flexible and unifying approach to measuring portfolio diversification. The paper demonstrates that portfolio’s RQE can encompass most existing measures, such as the portfolio variance, the diversification ratio, the normalized portfolio variance, the diversification return or excess growth rates, the Gini-Simpson indices, the return gaps, Markowitz’s utility function and Bouchaud’s general free utility. The paper also shows that assets selected under RQE can protect portfolios from mass destruction (systemic risk) and an empirical illustration suggests that this protection is substantial. |
| Keywords: | Portfolio Diversification, Rao’s Quadratic Entropy, Diversification Return, Diversification Ratio, Portfolio Variance Normalized, Gini-Simpson Index, Markowitz’s Utility Function, Bouchaud’s General Free Utility |
| JEL: | G11 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1508&r=upt |
| By: | Katja Görlitz; Marcus Tamm |
| Abstract: | This study analyzes how risk attitudes change when individuals become parents using longitudinal data for a large and representative sample of individuals. The results show that men and women experience a considerable increase in risk aversion which already starts as early as two years before becoming a parent, is largest shortly after giving birth and disappears when the child becomes older. These findings show that parenthood leads to considerable changes in individual risk attitudes over time. Thus, analyses using risk preferences as the explanatory variable for economic outcomes should be careful in interpreting the findings as causal effects. |
| Keywords: | Risk aversion, risk preferences, preference stability, parenthood, children, gender differences |
| JEL: | D1 D81 J13 J16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp756&r=upt |
| By: | Harin, Alexander |
| Abstract: | This article analyzes, from the purely mathematical point of view, a general practical problem. The problem consists in the influence of the scatter of experimental data on their mean values (and, possibly, on the probability) near the borders of intervals. The second central moment, the dispersion is a common measure of a scatter. Suppose, for instance, a nonnegative random variable X takes values in a finite interval . Write M for its mean. If there is a non-zero restriction on a central moment |E(X-M)n|≥|rnDisp.n|>0 under the condition 2≤n<∞, then A<(A+|rnDisp.n|/(B-A)n)≤M≤(B-|rnDisp.n|/(B-A)n). That is, |rnDisp.n|/(B-A)n)>0 is the width of a non-zero “forbidden zone” for the mean M near a border of the interval. Here, in the case of , this non-zero restriction is a restriction on the dispersion E(X-M)2≥r2Disp.2=σ2Min>0. So, if there is a non-zero restriction on the dispersion, then a non-zero “forbidden zone” exists for the mean near a border of the interval. |
| Keywords: | mean; dispersion; scatter; scattering; noise; probability; economics; utility theory; prospect theory; decision theories; human behavior; |
| JEL: | C0 C91 C93 D8 D81 |
| Date: | 2015–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64646&r=upt |
| By: | Paola Manzini (University of St. Andrews); Marco Mariotti (Queen Mary University of London) |
| Abstract: | We propose a novel method to model an agent who is imperfectly attentive in the sense that she may consider only some of the alternatives available. Our methodology departs from the standard 'revealed preference' one: we make plausible assumptions on the values to the imperfectly attentive agent of different choice situations. We derive in this way a simple reduced-form model that is compatible with several cognitive processes underlying choice: the agent stochastically forms a consideration set by noticing each alternative with a given probability and then maximises a deterministic utility function over the consideration set. |
| Keywords: | Attention, Bounded rationality, Stochastic choice |
| JEL: | D0 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp744&r=upt |
| By: | Shehsinski, Eytan; de Menil, Georges; Murtin, Fabrice |
| Abstract: | We argue that a rational-economic model of how societies choose their paygo tax rate can explain the cross section variance of these rates in large, developed OECD economies. Using a two-period OLG framework, we suggest that paygo tax rates are determined by a representative agent and a benevolent government jointly maximizing the expected life-time utility of the representative agent. In order to calculate these expected utilities, we construct probability distributions of life-time labor and capital income by simulating annual models of real wages and the return to capital estimated from data on real GDP and the real return to capital from the end of World War II to 2002. The joint distribution of the error terms is bootstrapped from the estmated errors of the annual equations. Expectations are taken over these distributions. The model predicts that each country chooses the paygo tax rate which maximizes the expected life-time utility of its representative agent. Risk aversion, described by a CRRA utility function, is assumed uniform across countries, such that the variance of the predicted rates is due exclusively to cross-country differences in the objective characteristics of the dynamics of wages and the return to capital in each country. These predicted rates are shown to explain 85% of the variance of observed effective-paygo rates. The calculations show that it is cross-country differences in the level and variability of the return to capital which are the most important source of this variance. We use the model to simulate a hypothetical world in which all countries share a unique, global capital market, and show that this scenario leads to a radical convergence of paygo rates. In a further exercise, we add an estimate of the probability of global crises like that of 2008 to the national distributions computed from post-War data, and examine the potential effect on paygo rates of these previously neglected, low probability events. |
| Keywords: | Pay-as-you-go, Savings, Risk Aversion, OLG, National Capital Markets |
| JEL: | H0 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64451&r=upt |
| By: | Shirish Panchal; Avdhesh S. Jha |
| Abstract: | Behavioral economics have provided insights about consumer behavior in a way that can help us understand consumer preferences and decision making in a better way. Standard economic theory assumes that people make economic choices on the basis of perfect self-interest. This simplifying assumption is useful to understand the concept of economic utility. However study of social preferences through the lens of behavioral economics and psychology points out that people do value the fairness of outcomes for others. They also reciprocate by punishing or rewarding the economic agents with whom they transact, even if they have to incur costs for this reciprocity. This paper highlights fairness perception and other regarding preferences of consumers and economic agents through thought experiments. There are four findings that the authors present in this paper. First: People empathize with the loss making economic agents and are willing to incur costs to transact with them. Second: Fairness perception of consumers gets modulated by the urgency of the need. Third: Consumer’s expectation of positive reciprocity increases with the strength of loyalty with their suppliers. Fourth: Stability of prices and wages is appreciated by people. Key words: Fairness, reciprocity, social preferences, consumer ecosystem, consumer preference, empathy, customer markets, labor markets |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:vor:issues:2014-12-11&r=upt |
| By: | Anderson, Alyssa G. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | During the financial crisis of 2008, origination and trading in asset-backed securities markets dropped dramatically. I present a model with ambiguity averse investors to explain how such a market freeze could occur and to investigate how ambiguity affects origination and securitization decisions. The model captures many features of the crisis, including market freezes and fire sales, as well as the timing and duration of the freeze. The presence of ambiguity also reduces real economic activity. Lastly, I consider the differing implications of ambiguity and risk, as well as the role of policies that reduce ambiguity during market freezes. |
| Keywords: | Structured finance; ambiguity aversion; market freezes |
| JEL: | E44 G01 G21 G28 |
| Date: | 2015–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-33&r=upt |
| By: | Thomas H. Jørgensen (Department of Economics, University of Copenhagen) |
| Abstract: | I study how children affect the marginal utility of non-durable consumption.I estimate by Maximum Likelihood a structural economic model of optimal intertemporal allocation of consumption in the presence of children using high quality Danish administrative longitudinal data. Contrary to existing studies, I allow income uncertainty, credit constraints, and post-retirement motives to affect household behavior while the number and age of all children can affect the marginal utility of consumption. I estimate that children have a negligible effect on the marginal utility of non-durable consumption. To reconcile these results with existing studies, typically estimating an important role for children while ignoring precautionary motives, I illustrate how ignoring precautionary motives increases the estimated importance of children. I interpret the results as indicating that precautionary motives might play a larger role than children in explaining the observed consumption age profile. |
| Keywords: | Consumption, Children, Precautionary saving, Life cycle, Structural Estimation |
| JEL: | D12 D14 D91 |
| Date: | 2015–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1508&r=upt |
| By: | Nikolay A. Andreev (National Research University Higher School) |
| Abstract: | We study a worst-case scenario approach to the problem of strategic portfolio selection in presence of transaction costs and trading limits under uncertain stochastic process of market parameters. Unlike classic stochastic programming, the approach is model-free, solution of the arising Bellman-Isaacs equation can be easily found numerically under some general assumptions. All results hold for a general class of utility functions and several risky assets. For a special case of proportional transaction costs and CRRA utility, we present a numerical scheme which allows to reduce the dimension of the Bellman-Isaacs equation by a number of risky assets. |
| Keywords: | portfolio selection, bellman equation, stochastic dynamic programming, transaction costs, worst-case scenario |
| JEL: | C61 C63 G11 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:45/fe/2015&r=upt |
| By: | Eduardo Astorino; Fernando Chague, Bruno Cara Giovannetti, Marcos Eugênio da Silva |
| Abstract: | We propose an implied volatility index for Brazil that we name "IVol-BR". The index is based on daily market prices of options over IBOVESPA -- an option market with relatively low liquidity and few option strikes. Our methodology combines standard international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option markets. We then do a number of empirical tests to validate the IVol-BR. First, we show that the IVol-BR has significant predictive power over future volatility of equity returns not contained in traditional volatility forecasting variables. Second, we decompose the squared IVol-BR into (i) the expected variance of stock returns and (ii) the equity variance premium. This decomposition is of interest since the equity variance premium directly relates to the representative investor risk aversion. Finally, assuming Bollerslev et al. (2009) functional form, we produce a time-varying risk aversion measure for the Brazilian investor. We empirically show that risk aversion is positively related to expected returns, as theory suggests. |
| Keywords: | IVol-BR; Variance Risk Premium; Risk-aversion |
| JEL: | G12 G13 G17 |
| Date: | 2015–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2015wpecon8&r=upt |
| By: | Edel Doherty (School of Business and Economics, National University of Ireland, Galway); Brendan Kennelly (School of Business and Economics, National University of Ireland, Galway); Darragh Flannery (Department of Economics, University of Limerick); Stephen Kynes (School of Business and Economics, National University of Ireland, Galway); John Considine (Department of Economics, University College Cork) |
| Abstract: | Data from a discrete choice experiment is used to explore preference heterogeneity associated with assignment systems between students in three universities in Ireland. The motivation for the study arises from recent technological advances which have led to a significant increase in the use of online assignment systems in disciplines such as economics and statistics. Despite this, little research exists to understand student preferences for online assignment systems and whether similarities emerge between students across universities. To investigate this issue, we employ latent class and random parameters logit models to explore both observed and unobserved heterogeneity in students’ tastes. Our findings reveal that significant heterogeneity in preferences is evident within and between students across the universities. The implications of this finding for the design of assignment systems are discussed. |
| Keywords: | Discrete choice experiment; Willingness to pay; Latent class model; Assignment systems; Student preferences |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:lim:wpaper:052013&r=upt |
| By: | Ingmar Schumacher; Benteng Zou |
| Abstract: | In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have a discrete impact on how an agent trades o future consumption and environmental quality. Thus, we endogenize the semi-elasticity of utility based on a step function. We nd that for low (high) thresholds, environmental quality converges to a low (high) steady state. For intermediate levels it converges to a stable p-cycle, with environmental quality being asymptotically bounded below and above by the low and high steady state. As policy implications we study shifts in the threshold. Costless shifts of the threshold are always worthwhile. If it is costly to change the threshold, then it is worthwhile to change the threshold if the threshold originally was suciently low. Lump-sum taxes lead to a development trap and a proportional income tax should be preferred. |
| Keywords: | thresholds, endogenous preferences, environmental quality, policy intervention |
| JEL: | Q28 Q56 |
| Date: | 2015–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2015-627&r=upt |
| By: | Jonathan de Quidt |
| Abstract: | Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success, an effect attributed to loss aversion. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. I formalize this intuition, then run an experiment to test it. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse or advantageous selection. Consistent with the existing literature, penalty contracts also increased performance on the job by 0.2 standard deviations. I outline extensions to the basic theory that are consistent with the main results, but argue that more research is needed on the long-term effects of penalty contracts if we want to understand why firms seem unwilling to use them. |
| Keywords: | loss aversion, reference points, framing, selection, Mechanical Turk |
| JEL: | D03 J41 D86 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stieop:052&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201505&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201508&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201511&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201512&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201503&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201509&r=upt |
| By: | Georgy Chabakauri |
| Abstract: | We consider a general equilibrium Lucas (1978) economy with one consumption good and two heterogeneous Epstein-Zin investors. The output is subject to rare large drops or, more generally, can have non-lognormal distribution with higher cumulants. The heterogeneity in preferences generates excess stock return volatilities, procyclical price-dividend ratios and interest rates, and countercyclical market prices of risk when the elasticity of intertemporal substitution (EIS) is greater than one. Moreover, the latter results cannot be jointly replicated in a model where investors have EIS ≤ 1 or CRRA preferences. We propose new approach for deriving equilibrium, and extend the analysis to the case of heterogeneous beliefs about probabilities of rare events. |
| Keywords: | heterogeneous investors; Epstein-Zin preferences; rare events; equilibrium; portfolio choice |
| JEL: | D53 G11 G12 |
| Date: | 2015–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:62003&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201504&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201510&r=upt |
| By: | John Bryant (Vocat International) |
| Abstract: | Chapter from a book entitled Entropy Man, which deals with the relationships between the disciplines of thermodynamics and economics. Chapter 1 illusrates how entropy impacts on the world in which we live. Chapter 2 is a short history of human development. Chapter 3 covers such concepts as the distribution of income, elasticity, the first and second laws of thermodynamics and utility. Chapter 4 explores production and consumption. Chapter 5 explores the relationship between economic entropy and money, illustrated by data of the UK and USA economies. Chapter 7 explores the relationship between economic entropy and employment. Chapter 8 sets out the key dynamics of resources.Chapter 9 illustrates trends in non-renewable resources of oil, gas, coal, nuclear power, steel, cement and Aluminium. Chapter 10 illustrates trends in renewable resources, including humankind, water, land and soil, cereals and grain, meat, fish, the greeen revolution, and renewable energy, including hydro-electric power, wind and solar energy. Chapter 11 is a summary of trends relating to climate change and economic output, and chapter 12 summarises how economics and entropy relate to a sustainable world. |
| Keywords: | Thermodynamics, economics, Le Chatelier, entropy, utility, money, equilibrium, value, energy, interest, elasticity, employment, climate change |
| JEL: | A1 C02 C68 D5 E O |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:em201507&r=upt |