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on Utility Models and Prospect Theory |
| By: | Ali al-Nowaihi; Sanjit Dhami |
| Abstract: | We set up a simple quantum decision model of the Ellsberg paradox. We find that the matching probabilities that our model predict are in good agreement with those empirically measured by Dimmock et al. (2015). Our derivation is parameter free. It only depends on quantum probability theory in conjunction with the heuristic of insufficient reason. We suggest that much of what is normally attributed to probability weighting might actually be due to quantum probability. |
| Keywords: | Quantum probability, Ellsberg paradox, probability weighting, matching probabilities, projective expected utility, projective prospect theory |
| JEL: | D03 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:16/08&r=upt |
| By: | Liu, Pengfei; Swallow, Stephen |
| Abstract: | This paper compares different preference elicitation methods used in choice ex- periments. We implemented four different methods to elicit individuals’ preference for a non-market good. Our four treatments include (1) a hypothetical referen- dum, (2) a real referendum lacking incentive compatibility, (3) a real choice with incentive compatibility and (4) a hybrid approach that combines (2) and (3). We develop a method to estimate the percentage of strategic choices in each treatment. We find that in the hypothetical referendum, about 75% to 92% individuals truth- fully reveal their preference and choose the option that gives the highest utility in a choice question. Adding policy consequentiality (e.g., the real referendum) and payment consequentiality (e.g., the hybrid approach) could increase the percentage of individuals truthfully reveal their preference. |
| Keywords: | Stated Preference, Policy Consequences, Incentive Compatibility, Wel- fare, Water Quality Trading, Environmental Economics and Policy, Institutional and Behavioral Economics, Land Economics/Use, Public Economics, Resource /Energy Economics and Policy, Q56, Q57, C72, |
| Date: | 2016–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236209&r=upt |
| By: | Bulut, Harun |
| Abstract: | Towards explaining regional differences in U.S. farmers’ crop insurance choices, we propose a budget heuristic effect within the standard Expected Utility Theory (EUT) framework and conduct theoretical and simulation analyses. We also disentangle the effects of various aspects the cumulative prospect theory (CPT) framework in a separate simulation analysis. |
| Keywords: | agricultural (crop and livestock) insurance, cumulative prospect theory, budget heuristics, mental accounting, Agricultural and Food Policy, Agricultural Finance, Crop Production/Industries, Demand and Price Analysis, Farm Management, Institutional and Behavioral Economics, Marketing, Production Economics, Public Economics, Research Methods/ Statistical Methods, Risk and Uncertainty, D81, D82, G22, G28, Q12, Q18, |
| Date: | 2016–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236019&r=upt |
| By: | O'Callaghan, Patrick |
| Abstract: | In civil conflicts, warring factions commit atrocities for arbitrarily small gains in territory. On the product of territory-atrocity pairs, such (revealed) preferences are lexicographic. In such settings, the external policy maker faces a nonmetrizable parameter space. Taking the policy maker’s preferences as primitive, we provide tools for evaluating and approximating policy in such settings. In particular, we provide necessary and sufficient conditions for a utility representation and a pseudometric, both of which are continuous on a parameter space with the minimal topological structure. We then bring our results to bear upon the Syrian conflict and propose a policy that is stable relative to a sufficiently moderate (ε-lexicographic) warring faction. |
| Keywords: | Utility; Parameter; metrizable; Lexicographic orderings; civil conflicts; Syria |
| JEL: | C6 D04 |
| Date: | 2016–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70989&r=upt |
| By: | Alejandro Arrieta (Florida International University); Ariadna García-Prado (Universidad Pública de Navarra); Paula González (Universidad Pablo de Olavide); Jose Luis Pinto-Prades (Universidad de Navarra) |
| Abstract: | The aim of this paper is to investigate how risk attitudes in medical decisions for others vary across health contexts. A lab experiment was designed to elicit the risk attitudes of 257 students by assigning them the role of a physician who must decide between treatments for patients. An interval regression model was used to estimate individual coefficients of relative risk aversion, and an estimation model was used to test for the effect of type of medical decision and experiment design characteristics on elicited risk aversion. We find that: (i) risk preferences for decisions involving life expectancy are different from those involving quality of life, but risk aversion prevails in all types of medical decisions; (ii) students enrolled in health-related degrees show a higher degree of risk aversion; and (iii) real rewards for third parties (patients) make subjects less risk-averse. The results underline the importance of accounting for doctors’ attitudes towards risk in medical decision-making. |
| Keywords: | physicians, risk aversion, health contexts, laboratory experiment, multiple price list format. |
| JEL: | I1 C91 D81 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:16.07&r=upt |
| By: | Riccardo Ferretti; Francesca Pancotto; Enrico Rubaltelli |
| Abstract: | We present a test of the behavioral versus the rational model of advertising in the financial market. We analyze the Granger-causality relationship existing between Comit stock market index and advertising of financial products and services from the most important daily published financial newspaper in Italy. We run the test for both the risky and non-risky advertising, finding that the behavioral model of advertising is supported when risky financial products and services are considered, while the rational model is true for the non-risky. We ascribe this result to the dual process of reasoning: When investors evaluate the decision to buy risky nancial products and services, they activate the automatic, rapid decision making process. The behavioral model of advertising copes with it and provides an advertising strategy that responds to market evolutions. When non-risky financial products and services are considered, a di erent mental process, requiring slow and sequential reasoning, operates, compatibly with a rational decision making process. |
| Keywords: | advertising, stock market index, behavioral model, dual process, Granger Causality |
| JEL: | G02 G20 M37 O51 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:16105&r=upt |
| By: | Subir Bose (University of Leicester); Arup Daripa (Department of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | We study the problem of elicitation of subjective beliefs of an agent when the beliefs are ambiguous (the set of beliefs is a non-singleton set) and the agent’s preference exhibits ambiguity aversion; in particular, as represented by alpha-maxmin preferences. We construct a direct revelation mechanism such that truthful reporting of beliefs is the agent’s unique best response. The mechanism uses knowledge of the preference parameter alpha and we construct a mechanism that truthfully elicits alpha. Finally, using the two as ingredients, we construct a grand mechanism that elicits ambiguous beliefs and alpha concurrently. |
| Keywords: | Ambiguity, alpha-maxmin preferences, maxmin preferences, elicitation of beliefs and alpha. |
| JEL: | D81 D82 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1601&r=upt |
| By: | Kentaro Kikuchi (Faculty of Economics, Shiga University) |
| Abstract: | This study proposes a joint pricing model for stocks and bonds in a no-arbitrage framework. A stock price representation is obtained in a manner consistent with the quadratic Gaussian term structure model, in which the short rate is the quadratic form of the state variables. In this study, specifying the dividend as a function using the quadratic form of the state variables leads to a stock price representation that is exponential-quadratic in the state variables. We prove that the coefficients determining the stock price have to satisfy some matrix equations, including an algebraic Riccati equation. Moreover, we specify the sufficient condition in which the matrix equations do have a unique solution. In our empirical analysis using Japanese data, we obtain estimates with a good fit to the actual data. Furthermore, we estimate the risk premiums for stocks and bonds and analyze how the BOJ fs unconventional monetary policy has affected these risk premiums. |
| Keywords: | risk premium, quadratic Gaussian term structure model, unscented Kalman filter, algebraic Riccati equation, controllability, portfolio rebalance |
| JEL: | C13 E43 E44 G12 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:shg:dpapeb:14&r=upt |
| By: | Wenjun Ma; Burkhard Schipper (Department of Economics, University of California Davis) |
| Abstract: | One fundamental assumption often made in the literature on unawareness is that risk preferences are invariant to changes of awareness. We study how exposure to unawareness a ects choices under risk. Participants in our experiment choose repeatedly between varying sure outcomes and a lottery in 3 phases. All treatments are exactly identical in phase 1 and phase 3, but di er in phase 2. There are ve di erent treatments pertaining to the lottery faced in phase 2: The control treatment (i.e., a standard lottery), the treatment with awareness of unawareness of lottery outcomes but known number of outcomes, the treatment with awareness of unawareness of outcomes but with unknown number of outcomes, the treatment with unawareness of unawareness of some outcomes, and the treatment with an ambiguous lottery. We study both whether behavior di ers in phase 3 across treatments (between subjects e ect) and whether di erences of subjects' behavior between phases 1 and phase 3 di ers across treatments (within subject e ects). We observe no signi cant treatment e ects. |
| Keywords: | Unawareness, Awareness of unawareness, Risk aversion, Experiments. |
| JEL: | C91 C92 D81 D87 |
| Date: | 2016–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:16-2&r=upt |
| By: | Atsushi Kajii (Institute of Economic Research, Kyoto University); Jingyi Xue (Singapore Management University) |
| Abstract: | We study a two-period saving model where the agent's future income might be ambiguous. Our agent has a version of the smooth ambiguity decision criterion (Klibanoff, Marinacci and Mukerji (2005)), where the agent's perception about ambiguity is described by a second-order belief over first-order risks. We model increasing ambiguity as a spreading-out of the second-order belief. We show that under a "Risk Comonotonicity" condition, our agent saves more when ambiguity in future income increases. We argue that the condition is indispensable for our result. |
| JEL: | D80 D81 D91 E21 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:940&r=upt |
| By: | Lukas Menkhoff; Sahra Sakha |
| Abstract: | We use a repeated incentivized risk experiment in rural Thailand to test determinants of changes in the level of individual risk aversion over time. We find that risk aversion significantly changes between 2008 and 2013 as a result of macro- andmicro-level shocks. Strong macroeconomic recovery following the 2007/08 financial crisis makes people more risk-seeking, whereas macroeconomic normalization thereafter increases risk aversion parameters. On the micro-level, we observe that negative economic and agricultural shocks increase risk aversion. Subjective perceptions of well-being and expectations also play a role but do not drive the macro-micro determinants of changes in individual risk aversion. |
| Keywords: | risk aversion, lab-in-the-field experiment, shocks, socio-economic determinants |
| JEL: | D01 D81 O12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1582&r=upt |
| By: | Agnes Kovacs |
| Abstract: | Abstract: This paper provides a quantitative assessment of the ‘temptation preferences' of Gul and Pesendorfer (2001) for understanding consumer life-cycle choices. I first confirm the empirical relevance of these preferences. I then show that they provide rational and straightforward explanations for many life-cycle features that appear to be inconsistent with standard preferences. These include the puzzle of ‘excess sensitivity' in consumption; the ‘retirement-consumption puzzle'; the demand for commitment devices; and the slow downsizing in housing towards the end of the life-cycle. |
| Keywords: | life-cycle models, temptation preferences, housing; estimating Euler-Equations |
| JEL: | D12 D91 E21 G11 R21 |
| Date: | 2016–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:796&r=upt |
| By: | Ifcher, John (Santa Clara University); Zarghamee, Homa (Barnard College); Graham, Carol Lee (Brookings Institution) |
| Abstract: | We develop a theoretical framework that considers four distinct explanatory channels through which neighbors' income could affect utility: public goods, cost of living, expectations of future income, and the direct effect (relative income hypothesis (RIH) and altruism). The relationship is theoretically ambiguous. We then empirically estimate the relationship with subjective well-being (SWB) data from the U.S. Gallup-Healthways Well-Being Index and geographically-based median-income data from the American Community Survey for both ZIP codes and MSAs. We find that the sign is proximity-dependent: the relationship is positive (negative) when using ZIP-code (MSA) median income as the reference income. This suggests that positive channels dominate locally while negative channels dominate regionally. These findings are consistent across multiple SWB measures and a wide range of health-related indices, for a variety of specification checks, and for most subgroups. Conditioning on explanatory-channel proxies, we find that the relationship between SWB and neighbors' income is either nullified or rendered positive, suggesting that the RIH is either inoperant or offset by altruism. Of the other channels, the public-goods channel is operant at the ZIP-code- and MSA-levels, and the cost-of-living channel is operant at the MSA-level. |
| Keywords: | subjective well-being, relative income hypothesis, others' income, reference group, relative utility, income comparison, happiness |
| JEL: | D6 D31 I31 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9934&r=upt |
| By: | Achille Basile (Università di Napoli Federico II); Maria Gabriella Graziano (Università di Napoli Federico II and CSEF); Maria Papadaki (National Technical University of Athens); Ioannis A. Polyrakis (National Technical University of Athens) |
| Abstract: | We study exchange economies in ordered normed spaces (X, ||.||) where agents have possibly different consumption sets. We define the notion of semi-interior point of the positive cone X+ of X, a notion weaker than the one of interior point. We prove that if X+ has semi-interior points, then the second welfare theorem holds true and a quasi equilibrium allocation exists. In both cases the supporting price is continuous with respect to a new norm |||.||| on X which is strongly related with the initial norm and the ordering, and in some sense can be considered as an extension of the norm adopted in classical equilibrium models. Many examples of cones in normed and Banach spaces with semi-interior points but with empty interior are provided, showing that this class of cones is a rich one. We also consider spaces ordered by strongly reflexive cones where we prove the existence of a quasi equilibrium without the closedness condition (i.e. without the condition that the utility space is closed). The results in the case of semi-interior points derive from those concerning the case of ordering cones with nonempty interior. |
| Keywords: | cones, equilibrium, ordered spaces, second welfare theorem, strongly reflexive cones |
| JEL: | C62 D51 |
| Date: | 2016–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:443&r=upt |
| By: | Nicolas Lampach; Sandrine Spaeter |
| Abstract: | In this paper we revise the results about the efficiency of (strict) unlimited, then limited liability in inducing optimal investment in prevention by injurers. Risk and ambiguity are considered. We assume that the potential injurer whose activities cause a risk of environmental accident can reduce the probability of accident by investing in prevention. In the risky model, we recover that limited liability does not always induce low prevention. Contrary to the arguments enhanced by Beard (1990) and Lipowski-Posey (1993), outside lending, absent from our model, does not explain this result. In the ambiguous context, we implement the Non-Extreme Outcome (NEO) expected utility model (Chateauneuf et al., 2007) to represent the injurer’s beliefs and decisions. When ambiguity matters and prevention also affects the injurer’s subjective beliefs, none of the results with risk hold. In particular, the injurer can overinvest in prevention under both unlimited and limited liability. |
| Keywords: | Strict liability; Ambiguity; Optimal Care; Optimism; Subjective Beliefs. |
| JEL: | K0 K32 D81 D29 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2016-29&r=upt |
| By: | Gollier, Christian |
| Abstract: | We fill a gap in the literature by formally defining the notion of aversion to risk of regret. An agent is sensitive to regret when her ex-post utility depends upon the forgone best payoff. An increase in the risk of regret occurs when the actual payoff and this best alternative become statistically less concordant. Accordingly, regret-risk aversion is characterized by the supermodularity of the bivariate utility function. We define a measure of regret-risk aversion in the small and in the large. We show that more regretrisk- averse agents are more willing to choose the risky act in a one-risky-one-safe menu, and that this bias is increasing in the skewness of the risky choice. This can explain the "possibility effect" that is well documented in decision theory. Symmetrically, we define the aversion to elation-risk that can prevail when the ex-post utility is alternatively sensitive to the forgone worst payoff. We show that elation-risk-seeking can explain the "certainty effect". We also show that a regret-risk-averse and elation-risk-seeking people behave as if they would have rank-dependent utility preferences with an inverse-S shaped probability weighting function that reproduces estimations existing in the literature. |
| Keywords: | Longshot bias, certainty effect, possibility effect, probability weighting, riskseeking,prospect theory, behavioral finance. |
| JEL: | D81 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:30472&r=upt |
| By: | Gaudeul, Alexia |
| Abstract: | We refine the understanding of individual preferences across social lotteries, whereby the payoffs of a pair of subjects are exposed to random shocks. We find that aggregate behavior is ex-post and ex-ante inequality averse, but also that there is a wide variety of individual preferences and that the majority of subjects are indifferent to social concerns under risk. Furthermore, we determine whether subjects are averse to collective risk - the variability in the sum of payoffs of the pair. We do so by varying the presentation of payoffs. They are shown side by side in one treatment and added-up in the other. The first presentation draws attention to inequality in payoffs, the second to collective risk. We find that subjects dislike lotteries that lead to ex-post unequal distributions of payoffs in both cases and that emphasizing collective risk changes choice only marginally and not significantly, though in the direction of collective risk reduction. We conclude that ex-post inequality aversion is the primary concern in the evaluation of social lotteries while collective risk is only of secondary interest. |
| Keywords: | Altruism,Collective Risk,Experimental Economics,Fairness,Inequality,Risk,Social Lotteries,Social Preferences |
| JEL: | C91 D63 D81 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:283&r=upt |
| By: | Giandomenico, Rossano |
| Abstract: | The study analyses quantitative models for financial markets by starting from geometric Brown process and Wiener process by analyzing Ito’s lemma and first passage model. Furthermore, it is analyzed the prices of the options, Vanilla & Exotic, by using the expected value and numerical model with geometric applications. From contingent claim approach ALM strategies are also analyzed so to get the effective duration measure of liabilities by assuming that clients buy options for protection and liquidity by assuming defaults protection barrier as well. Furthermore, the study analyses interest rate models by showing that the yields curve is given by the average of the expected short rates & variation of GDP with the liquidity risk, but in the case we have crisis it is possible to have risk premium as well, the study is based on simulated modelisation by using the drift condition in combination with the inflation models as expectation of the markets. Moreover, the CIR process is considered as well by getting with modification of the diffusion process the same result of the simulated modelisation but we have to consider that the CIR process is considered in the simulated environment as well. The credit risk model is considered as well in intensity model & structural model by getting the liquidity and risk premium and the PD probability from the Rating Matrix as well by using the diagonal. Furthermore, the systemic risk is considered as well by using a deco relation concept by copula approaches. Moreover, along the equilibrium condition between financial markets is achieved the equity pricing with implications for the portfolio construction in simulated environment with Bayesian applications for Smart Beta.. Finally, Value at Risk is also analyzed both static and dynamic with implications for the percentile of daily return and the tails risks by using a simulated approach. |
| Keywords: | Contingent Claim, Interest Rate Models, Credit Risk Model, Portfolio, VAR |
| JEL: | F37 F47 G22 G24 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71627&r=upt |
| By: | Santiago I. Sautua |
| Abstract: | Previous research has shown that often there is clear inertia in individual decision making? that is, a tendency for decision makers to choose a status quo option. I conduct a laboratory experiment to investigate two potential determinants of inertia in uncertain environments: (i) regret aversion and (ii) ambiguity-driven indecisiveness. I use a between-subjects design with varying conditions to identify the e¤ects of these two mechanisms on choice behavior. In each condition, participants choose between two simple real gambles, one of which is the status quo option. I ?nd that inertia is quite large and that both mechanisms are equally important. |
| Keywords: | status quo, inertia, reference-dependent preferences, regretaversion, ambiguity, indecisiveness |
| JEL: | C91 D01 D03 D81 |
| Date: | 2016–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:014587&r=upt |
| By: | Breitmoser, Yves |
| Abstract: | Multinomial logit is the canonical model of discrete choice and widely used to analyze preferences and welfare. Its axiomatic foundation is incomplete: binomial logit is assumed; independence of irrelevant alternatives extends logit to multinomial choice. The present paper provides a self-contained foundation, showing that the axiom "binomial choice is logit" is behaviorally founded by "narrow bracketing" and "no systematic mistakes" (e.g. default effects). This in turn allows me to drop the no-mistakes axiom, yielding generalized logit accounting for systematic mistakes axiomatically consistently. The results position logit in the "mistakes-debate" in behavioral welfare and clarify the foundation for the functional form. |
| Keywords: | logit, axiomatic foundation, discrete choice, utility estimation, welfare |
| JEL: | D03 |
| Date: | 2016–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71632&r=upt |