|
on Utility Models and Prospect Theory |
| By: | Simone Cerreia Vioglio; Fabio Maccheroni; Massimo Marinacci |
| Abstract: | We characterize the consistency of a large class of nonexpected utility preferences (including mean-variance preferences and prospect theory preferences) with stochastic orders (for example, stochastic dominances of different degrees). Our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision makers preferences. As an illustration, we consider in some detail prospect theory and choice-acclimating preferences, two popular models of reference dependence under risk, and we show the incompatibility of loss aversion with prudence. JEL classi cation: D81 Keywords: Stochastic dominance, integral stochastic orders, nonexpected utility, risk aversion, multi utility representation, prospect theory, choice-acclimating personal equilibria |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:549&r=upt |
| By: | Michele Costola (Department of Economics, University Of Venice Cà Foscari); Massimiliano Caporin (Department of Economics and Management, University Of Padova) |
| Abstract: | We present a rational learner agent, which considers the information coming from a behavioral counterpart during the allocation process. The learner agent adopts a herding behaviour by conditioning her choice on the selection of the portfolio's constituents. The considered framework has therefore two types of agents with two different utility functions: the rational agent with a hyperbolic absolute risk aversion (HARA) utility function and the other one with a general behavioral utility function. We use the concept of performance measure related to utility functions to define agents' preferences: the higher the measure, the higher the expected utility of a given asset. The rational learner agent updates her information in a Bayesian manner similarly to the Black-Litterman model, which makes use of a weighting factor in blending the two components. We support our methodological framework with an empirical analysis including all the assets present in the NASDAQ and NYSE stock exchange from September 1977 to December 2014. |
| Keywords: | learner agent, investment decision, behavioral agents, Bayesian updating. |
| JEL: | G10 G14 G15 G17 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2015:16&r=upt |
| By: | José Antonio Robles-Zurita (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | The outcome distribution of a sum of identical monetary lotteries ( ) is described with a Markov model. A decision maker with the alternation bias believes in more negative autocorrelation between lotteries and perceives as a less risky asset (lower variance) than a rational agent does. Also the expected utility of for a risk averse (risk seeking) individual is higher (lower) if she is a believer in the alternation bias. This theoretical result can be applied to the analysis of decisions on repeated investments and turns to be a plausible explanation for Samuelson's fallacy of large numbers.. |
| Keywords: | alternation bias; repeated lotteries, expected utility, risk aversion, Markov chain; behavioural finance |
| JEL: | D03 D81 G02 G11 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:15.08&r=upt |
| By: | Freeman, David; Halevy, Yoram; Kneeland, Terri |
| Abstract: | We experimentally study the effect of embedding pairwise choices between lotteries within a choice list on measured risk attitude. Subjects choose the riskier lottery significantly more often when responding to a choice list. This failure of incentive compatibility can be rationalized by the interaction between non-expected utility and the random incentive system, as suggested by Karni and Safra (1987). |
| Keywords: | random incentive system, isolation, independence axiom, multiple price list, reduction of compound lotteries, preference reversals. |
| JEL: | D81 C91 |
| Date: | 2015–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:yoram_halevy-2015-9&r=upt |
| By: | Bojan Krstic, Milos Krstic (University of Niš, Faculty of Economics,University of Nis, Faculty of Science and Mathematics) |
| Abstract: | According to rational choice theory, rational consumers tend to maximize utility under a given budget constraints. This will be achieved if they choose a combination of goods that cannot satisfy their needs and provide the maximum level of utility. Gary Becker imagines irrational consumers who choose bundle on the budget line. As irrational consumers have an equal probability of choosing any bundle on the budget line, on average, we expect that they will pick the bundle lying at the midpoint of the line. The results of research in which artificial Becher’s agents choose among more than two commodities rational choice theory is small. And in more than two budget/price situations show that the percentage of agents whose behaviour violate. Adding some factors to Becker’s model of random behaviour, experimenters can minimize these minor violations and fit the actor’s choice with the theory. In addition, the results of organizations’ choices analysis show that the observed agents behave rationally, and this behaviour confirms the theory rational choice. Therefore, rational choice theory is unfalsifiable. As the theory can always fits with the facts, it would have been much more productive if we had admitted that the theory was falsifiable and then debated its explanatory value in specific circumstances. |
| Keywords: | rational choice theory, Beker’s model of random behaviour, generalized axiom of revealed preference, falsifiability, utility maximization, rationality assumption |
| JEL: | A1 D1 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:esb:petprv:2015-101&r=upt |
| By: | John Griffin (U.S. Department of Defense) |
| Abstract: | Objectives: I examine risk premia and the influence of Knightian uncertainty in a laboratory market featuring a long-lived asset. Methods: I employ an experimental asset market, utilizing features which are designed to forestall bubbles and crashes. I alter the riskiness of the asset from market to market along two dimensions— expected variance and upside/downside potential. Furthermore, I include a treatment which introduces uncertainty with respect to the expected value of the asset. Results: Bubbles and crashes are absent. Positive, statistically significant risk premia emerge. The risk premia are not sensitive to expected variance, but do vary positively with the magnitude of potential loss. The introduction of Knightian uncertainty does not appear to influence market prices, however it does increase trading volume. Conclusions: When speculative activity is tempered, risk aversion is manifest in market prices. Subjects appear to view risk in the context of potential loss rather than volatility. Return premia for uncertainty are absent, suggesting a lack of uncertainty aversion. Increased trading activity in the presence of uncertainty may be due to differing opinions with regards to the value of the asset or to divergent levels of uncertainty aversion. |
| Keywords: | Risk Premia, Risk Aversion, Loss Aversion, Ambiguity, Uncertainty |
| JEL: | C92 D81 D83 G11 G12 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2015-01&r=upt |
| By: | Michael Carter; Ghada Elabed; Elena Serfilippi |
| Abstract: | While behavioral economic experiments have uncovered a wealth of insights concerning how people decide in the face of risk and uncertainty, the implications of these insights for the demand for agricultural insurance are under-explored. |
| Keywords: | Ambiguity aversion, Discontinuous preferences, Index insurance, Risk and uncertainty |
| JEL: | F Z |
| Date: | 2015–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:mpr:mprres:b304229c8789460683a3e4ed3ac83670&r=upt |
| By: | Ulrich Schmidt; Levent Neyse; Milda Aleknonyte |
| Abstract: | Standard economic theory assumes that individual risk taking decisions are independent from the social context. Recent experimental evidence however shows that the income of peers has a systematic impact on observed degrees of risk aversion. In particular, subjects strive for balance in the sense that they take higher risks if this gives them the chance to break even with their peers. The present paper is, to the best of our knowledge, the first systematic analysis of income inequality and risk taking. We perform a real effort field experiment where inequality is introduced to different wage rates. After the effort phase subjects can invest (part of) their salary into a risky asset. Besides the above mentioned possibility of higher risk taking of low-wage individuals to break even with high-wage individuals, risk taking can be influenced by an income effect consistent with e.g. decreasing absolute risk aversion and a house money effect of high- wage individuals. Our results show that the dominant impact of inequality on risk taking is what can be termed a social house money effect: high-wage individuals take higher risks than low- wage individuals only if they are aware of the inequality in wages |
| Keywords: | Risk, Inequality, Real Effort, Field Experiment, Social Comparison |
| JEL: | C93 D63 J31 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:2000&r=upt |
| By: | Yang, Yingrui |
| Abstract: | The current economics and psychology are developed within the Newtonian tradition in physics from both conceptual and instrumental perspectives. This paper aims to integrate economics and cognitive science by applying gauge field theory of modern theoretical physics. Many controversies between normative theories and behavioral theories are characterized by the “man vs. men” dilemma. Gauge potential and gauge field strength is constructed at both the man-level and the men-level in order to satisfy the principle of gauge invariance. To maintain the Lagrangian density function invariant, the gauge transformations of the first kind and the second kind are performed at the man-level and the men-level, respectively. The market dynamics is modeled by the logic of electrodynamics. The interactions of the market and individual participants are formulated by the logic of electromagnetic coupling. In establishing the market dynamic equations, individual utility function serves as gauge function and efficiency provides gauge freedom. |
| Keywords: | bounded rationality; economic rational man; electrodynamics; gauge theory; market dynamics; cognitive field |
| JEL: | A1 A12 C0 C02 D0 D01 D03 |
| Date: | 2015–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65015&r=upt |
| By: | Simone Quercia (University of Bonn, Institute for Applied Microeconomics (IAME)) |
| Abstract: | Betrayal aversion has been operationalized as the evidence that subjects demand a higher risk premium to take social risks compared to natural risks. This evidence has been first shown by Bohnet and Zeckhauser (2004) using an adaptation of the Becker – DeGroot – Marshak mechanism (BDM, Becker et al. (1964)). We compare their implementation of the BDM mechanism with a new version designed to facilitate subjects’ comprehension. We find that, although the two versions produce different distributions of values, the size of betrayal aversion, measured as an average treatment difference between social and natural risk settings, is not different across the two versions. We further show that our implementation is preferable to use in practice as it reduces substantially subjects’ mistakes and hence the likelihood of noisy valuations. |
| Keywords: | experiments, betrayal aversion, trust game, Becker – DeGroot – Marshak mechanism, preference elicitation |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2015-09&r=upt |
| By: | Amita Majumder; Ranjan Ray |
| Abstract: | This paper provides Indian evidence on sub-national PPP s that point to considerable spatial price heterogeneity within the country. This paper shows that the CPD model, proposed in the cross country context, can be adapted to the household context to estimate spatial prices in the intra country context. The proposed CPD based model is shown to be formally equivalent to certain well known fixed weight price indices under certain parametric configurations. The empirical contribution includes a systematic comparison between the spatial price indices from alternative models, namely the CPD and utility based models, and the result that the utility based methods point to a much greater extent of spatial price heterogeneity than is suggested by the CPD type models. The results also record the sensitivity of the spatial price indices to the choice of items in the utility based approach. The pair wise comparison of estimates suggests that item selection may be more important than model selection in its impact on the spatial price estimates, though the latter is important as well. The study provides estimates of rural urban differentials in spatial price indices that suggest some interesting differences between the constituent states. The results make a strong case for further research on the topic of sub-national PPPs in the context of large heterogeneous countries. |
| Keywords: | Household Regional Product Dummy Model, QAIDS, Spatial Price Index, Sub-national PPP |
| JEL: | C12 C18 D12 E30 E31 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2015-11&r=upt |
| By: | Okay Gunes (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Armagan Tuna Aktuna-Gunes (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics) |
| Abstract: | In this article, the satisfactory consumption and labor supply elasticities of demand are measured through a model of time allocation that includes eight time assignment equations by using the full time use (the temporal values of the monetary expenditure plus time spent) concept obtained by matching the Classic Family Budget survey with the Time Use survey for Turkey. The cross-sectional data covers the period of 2003-2006 in Turkey. The elasticity results show a clear picture of the relationship between satisfactory consumption and working with commodity demands for Turkey. As a contribution to the literature, we explore the reasons behind the demand for satisfactory consumption through working decisions by measuring well-being inequality for each consumption group. In order to increase the robustness of our result, overall well-being inequality is measured by introducing the axiom of superposed utility of preferences. As expected, overall well-being inequality declines to 0.26, which is 119 percentage points lower than the average rate of well-being inequality (0.57) in Turkey. |
| Abstract: | Dans cet article, les élasticités de consommation satisfaisante et de l'offre de travail de demande sont mesurées par un modèle d'allocation du temps qui comprend huit équations en utilisant du temps complet (les valeurs temporelles des dépenses monétaires plus les dépenses temporelles) obtenu par l'appariement statistique des enquêtes turques sur le Budget des Familles avec l'enquête sur l'Emploi du Temps. Les données transversales couvrent les années 2003-2006 en Turquie. Les résultats des élasticités montrent une image claire de la relation entre la consommation satisfaisante et l'offre du travail avec les demandes de bien pour la Turquie. Comme contribution à la littérature, nous explorons les raisons derrière de la demande de consommation satisfaisante grâce à la décision de travail en mesurant l'inégalité de bien-être dans chaque groupe de consommation. Afin d'augmenter la robustesse de nos résultats, l'inégalité du bien-être général est mesurée en introduisant l'axiome d'utilité superposée de préférences. Comme prévu, l'inégalité de bien-être général diminue à 0,26 qui est de 119 points de pourcentage moins que le taux moyen de l'inégalité de bien-être général (0,57) en Turquie. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01161880&r=upt |
| By: | Ben-Haim, Yakov; Demertzis, Maria |
| Abstract: | The distinction of risk vs uncertainty as made by Knight has important implications for policy selection. Assuming the former when the latter is relevant can lead to wrong decisions. With the aid of a stylized model that describes a bank's decision on how to allocate loans, the authors discuss decision making under Knightian uncertainty. They use the info-gap robust satisficing approach to derive a trade-off between confidence and performance (analogous to confidence intervals in the Bayesian approach but without assignment of probabilities). They show that this trade off can be interpreted as a cost of robustness and that the robustness analysis can lead to a reversal of policy preference from the putative optimum. They then compare this approach to the min-max method which is another main non-probabilistic approach available in the literature. |
| Keywords: | uncertainty vs risk,confidence,robustness,satisficing,info-gap |
| JEL: | C02 C18 D81 G10 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201542&r=upt |
| By: | Rolf Aaberge; Ugo Colombino (Statistics Norway) |
| Abstract: | This paper is published as Chapter 7 of Handbook of Microsimulation Modelling edited by Cathal O’'Donoghue, and issued in the series Contributions to Economic Analysis by Emerald Publishing Group. The purpose of the paper is to provide a detailed discussion in relation to the development of the field of labour supply focused microsimulation models and methodological choices. The paper identifies three methodologies for modelling labour supply • *The Reduced Form Approach • *The Structural “Marginalist” Approach • *The Random Utility Maximisation Approach The paper considers issues associated with the reliability of structural models relative to (ex-post) experimental or quasi-experimental analysis. Recognising however the need to undertake ex-ante analysis, it questions, whether there are alternatives to structural models and how can we evaluate structural models and how they are compared with other approaches. The paper then describes approaches to utilising these models for policy simulation in terms of producing and interpreting simulation outcomes, outlining an extensive literature of policy analyses utilising the approach. Also labour supply is not only central to modelling behavioural response but also modelling optimal tax-benefit systems, with a focus on a computational approach, given some of the challenges of the theoretical approach. Combining labour supply results with welfare functions enables the social evaluation of policy simulations. Combining welfare functions and labour supply functions, the chapter then identifies how to model socially optimal income taxation. |
| Keywords: | inequality; poverty; deprivation; multidimensional well-being; capabilities and functionings |
| JEL: | D10 D31 H21 H24 J20 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:807&r=upt |
| By: | Vincenzo Platino (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Elena L. Del Mercato (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS) |
| Abstract: | We consider a general equilibrium model of a private ownership economy with consumption and production externalities. The choices of all agents (households and firms) may affect utility functions and production technologies. The equilibrium notion blends Arrow-Debreu with Nash, that is, agents (households and firms) maximize their goals by taking as given both commodity prices and choices of every other agent in the economy. We provide an example showing that under standard assumptions, such economies may have infinitely many equilibria. We present our model with firms' endowments following Geanakoplos, Magill, Quinzii and Drèze (1990). Firms' endowments consist of amounts of commodities held by the firms to generate receipts from sales of initially-held stocks of commodities and claims from debts, subsidies and taxes expressible in terms of them. We prove that almost all economies are regular in the space of endowments of households and firms. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01162039&r=upt |