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on Utility Models and Prospect Theory |
| By: | Petraud, Jean; Boucher, Stephen; Carter, Michael |
| Abstract: | Low demand for index insurance in several recent pilot programs has created a puzzle for development economists and policy makers concerned with enhancing farmers risk management capacity in low-income economies. This paper contributes to the resolution of this puzzle by providing empirical evidence on the relative effectiveness of two primary frameworks for modeling decision-making under uncertainty. Specifically, we test whether features of Cumulative Prospect Theory (CPT), or Expected Utility Theory (EUT), better predict farmers' demand for crop insurance. Whereas in EUT, risk preferences can be represented by a single risk aversion parameter, in CPT they are determined by at least four components: probability weighting, the curvature of a utility function, a reference income and loss aversion. The data come from a series of unframed and framed lotteries played with 480 small-holder cotton farmers in southern Peru. The unframed risk games allow us to measure individual-specific preference parameters, for both theories. We use these parameters to generate predictions of farmers' choices in two framed insurance games in which farmers choose to purchase one of two available insurance contracts or to purchase no insurance. In the first game, farmers' earnings are framed as gross revenues and are always positive, i.e., this game is played over gains. In the second game, earnings are framed as net revenues and may be either positive or negative so that this is a game played over mixed prospects. We test the relative performance of the two theories by comparing the predictions of farmers' choices versus their actual choices in the insurance games. An important finding with respect to marketing of insurance contracts is that framing incomes as net revenues instead of gross revenues increases the CPT predicted demand by 24%. In the actual insurance games however, only 8% more farmers chose insurance in the net revenues frame. We find that neither theory is a particularly strong predictor of insurance choices, although EUT fares better than CPT for better educated farmers. |
| Keywords: | Crop Production/Industries, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae15:211383&r=upt |
| By: | Serfilippi, Elena; Carter, Michael; Guirkinger, Catherine |
| Abstract: | In this paper, we argue that discontinuous preference over certain and uncertain outcomes (as in Andreoni and Sprenger, 2009; 2012) have a dampening effect on the demand for insurance. The intuition is that if agents exhibit a disproportionate preference for certain outcomes, they would undervalue uncertain insurance indemnity payments compared to certain premium cost and exhibit lower demand for insurance compared to a classic expected utility maximizer. Inspired by the seminal work of Andreoni and Sprenger, we design games to identify agents with a disproportionate preference for certain outcomes and play them with 571 cotton farmers in Western Burkina-Faso. We then provide experimental evidence that this is a powerful framework to understand demand for micro-insurance. Specifically we show that agents with discontinuous preference respond positively to an alternative presentation of a classic insurance contract: they are willing to pay more for a given contract if the premium cost is artificially made uncertain by being directly deducted from indemnity payments. We also explore alternative behavioral arguments such as loss aversion but argue that they offer less appealing framework to understand the full set of our results. Our results have practical implications for the design of insurance contracts. |
| Keywords: | Index Insurance, Risk and Uncertainty, Discontinuity of preferences, Field Experiments, Crop Production/Industries, Q12, D03, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae15:211384&r=upt |
| By: | Gudmundsson, Jens (Department of Economics, Lund University) |
| Abstract: | Can we reconcile stability with non-manipulability in pairing problems by selecting lotteries over matchings?We examine the problem of eliciting preferences to make pairs as introduced by Gale and Shapley (1962). We develop ex-ante notions of stability and non-manipulability that are parameterized by collections of utility functions. In particular, we study the collection of utility functions with increasing differences for which stability and non-manipulability turn out to characterize Compromises and Rewards. This is a novel rule that is fundamentally different from the one that has attracted most attention in the literature, Deferred Acceptance. |
| Keywords: | Pairing; Lottery; Stability; Non-manipulability; Compromises; Rewards |
| JEL: | C62 D02 D60 |
| Date: | 2015–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2015_032&r=upt |
| By: | Jörg Döpke (Hochschule Merseburg (University of Applied Sciences Merseburg)); Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Christian Pierdzioch (Helmut-Schmidt-Universität (Helmut-Schmidt-University)) |
| Abstract: | We use a machine-learning approach known as Boosted Regression Trees (BRT) to reexamine the usefulness of selected leading indicators for predicting recessions. We estimate the BRT approach on German data and study the relative importance of the indicators and their marginal effects on the probability of a recession. We then use receiver operating characteristic (ROC) curves to study the accuracy of forecasts. Results show that the short-term interest rate and the term spread are important leading indicators, but also that the stock market has some predictive value. The recession probability is a nonlinear function of these leading indicators. The BRT approach also helps to recover how the recession probability depends on the interactions of the leading indicators. While the predictive power of the short-term interest rates has declined over time, the term spread and the stock market have gained in importance. We also study how the shape of a forecaster’s utility function affects the optimal choice of a cutoff value above which the estimated recession prob- ability should be interpreted as a signal of a recession. The BRT approach shows a competitive out-of-sample performance compared to popular Pro- bit approaches. |
| Keywords: | Recession forecasting, Boosting, Regression trees, ROC curves |
| JEL: | C52 C53 E32 E37 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201505&r=upt |
| By: | Baba, Yasmina; Kallas, Zein; Gil, Jose; Realini, Carolina |
| Abstract: | The impact of hedonic evaluation on consumers’ preferences towards beef attributes including its enrichment with polyunsaturated fatty acids (PFA) was evaluated. 647 Spanish consumers were divided into two groups differentiated by the information received. Consumers evaluated five beef attributes (origin, animal diet, amount of visible fat, meat colour and price) by conducting a choice experiment (CE) and using the recently developed Generelized Multinomial Logit (G-MNL). Subsequently, consumers conducted a blind tasting of four different beef samples and later informed about what they taste. Finally consumers repeated the CE. By estimating the G-MNL, it allows respondents to have different utility function scales that describe a different uncertainty levels with respect to the choices they make. In this case, hedonic evaluation of beef samples and information had a significant impact on consumer beef preferences, choices and scale parameters. Results show that giving consumers additional information, the average error scales decreased significantly. |
| Keywords: | Consumer preferences, beef, Choice Experiments, Generalized multinomial logit., Food Consumption/Nutrition/Food Safety, Livestock Production/Industries, C5, C90, Q13, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae15:211191&r=upt |
| By: | Corsi, Alessandro; Novelli, Silvia |
| Abstract: | Personal relationships can affect economic life and they may be even more important in Alternative Food Networks. We estimate the value of the relational good produced by the personal relationship in direct sales by farmers. This is relevant for assessing the importance of personal interaction in a typically economic behavior like food purchase. Drawing from theoretical considerations, we employ a stated preferences methodology to estimate the value consumers buying directly from farmers attach to their particular choice of vendor. We estimated a difference-in-utility model and a model based on the valuation function, using data from a consumer survey in open-air markets in four towns in Piedmont Region (Italy). Contingent on the chosen model, the average value is 10-12 percent of the consumers’ expenditure for fruits and vegetables, and up to 1.2-1.3 percent of their overall income. |
| Keywords: | relational goods, stated preferences, direct sales, alternative food networks, Agricultural Finance, Consumer/Household Economics, C5, D1, Q13, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae15:211550&r=upt |
| By: | Fabrice Murtin; Romina Boarini; Juan Cordoba; Marla Ripoll |
| Abstract: | This paper builds a welfare measure encompassing household disposable income, unemployment and longevity, while using two different sets of “shadow prices” for non-income variables. The valuations of vital and unemployment risks estimated from life satisfaction data (“subjective shadow prices”) and those derived from model-based approaches and calibrated utility functions (“model-based shadow prices”) are shown to be broadly consistent once a number of conditions are fulfilled. Subjective shadow prices appear to be inflated by the downward bias on the income variable in life satisfaction regressions conducted at the individual level, while the latter bias is largely removed when running regressions at the country level. On the other hand, model-based shadow prices are typically underestimated as: i) the valuation of the unemployment risk is assumed to take place under the veil of ignorance (i.e. for a representative agent that has no information on her current or future unemployment situation); ii) the standard model relies on a Constant Relative Risk Aversion (CRRA) utility function, which has no specific relative risk aversion parameter for unemployment and vital risks; iii) the Value of Statistical Life that is used in standard calibration pertains to the adult lifespan while life expectancy at birth covers the entire lifetime.<BR>Les auteurs proposent une mesure du bien-être fondée sur le revenu disponible des ménages, le chômage et la longévité ainsi que sur deux ensembles de « prix implicites » de composantes non monétaires. Ils montrent que les valeurs attribuées au risque pour la vie et au risque de chômage, qui sont calculées à partir de données relatives à la satisfaction à l’égard de la vie (« prix implicites subjectifs ») ou découlent de l’application d’approches par modélisation et de fonctions d’utilité calibrées (« prix implicites obtenus par modélisation »), sont globalement cohérentes dès lors qu’un certain nombre de conditions sont réunies. Il apparaît que les prix implicites subjectifs sont surestimés en raison des erreurs de mesure affectant la variable revenu dans les régressions de la satisfaction à l’égard de la vie effectuées au niveau individuel, tandis que ce même biais est largement réduit dans les régressions effectuées au niveau des pays. À l’inverse, les prix implicites obtenus par modélisation sont généralement sous-estimés quand : i) on suppose que la valeur du risque de chômage est calculée « sous le voile de l’ignorance » (c’est-à-dire pour un agent représentatif qui ne possède aucune information quant à sa situation d’inactivité actuelle ou future) ; ii) le modèle type repose sur une fonction d’utilité à aversion relative au risque constante (CRRA), dans laquelle aucun des paramètres de l’aversion relative au risque ne concerne le risque pour la vie ou le risque de chômage ; iii) on utilise pour le paramétrage la valeur d’une vie statistique, laquelle correspond à la durée de la vie adulte tandis que l’espérance de vie à la naissance couvre toute la durée de la vie. |
| Date: | 2015–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:oec:stdaaa:2015/5-en&r=upt |