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on Utility Models and Prospect Theory |
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Issue of 2016‒11‒27
ten papers chosen by |
| By: | Stefania Minardi (Economics and Decision Sciences Department, HEC Paris); Andrei Savochkin (New Economic School (NES)) |
| Abstract: | We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0222&r=upt |
| By: | Ankush Agarwal (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique); Ronnie Sircar (Princeton University, Princeton, NJ, United States) |
| Abstract: | We consider an investor who seeks to maximize her expected utility derived from her terminal wealth relative to the maximum performance achieved over a fixed time horizon, and under a portfolio drawdown constraint, in a market with local stochastic volatility (LSV). In the absence of closed-form formulas for the value function and optimal portfolio strategy, we obtain approximations for these quantities through the use of a coefficient expansion technique and nonlinear transformations. We utilize regularity properties of the risk tolerance function to numerically compute the estimates for our approximations. In order to achieve similar value functions, we illustrate that, compared to a constant volatility model, the investor must deploy a quite different portfolio strategy which depends on the current level of volatility in the stochastic volatility model. |
| Keywords: | portfolio optimization,drawdown,stochastic volatility,local volatility |
| Date: | 2016–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01388399&r=upt |
| By: | Lioudmila Vostrikova (LAREMA - LAREMA - Laboratoire Angevin de REcherche en MAthématiques - CNRS - Centre National de la Recherche Scientifique - UA - Université d'Angers) |
| Abstract: | We consider expected utility maximisation problem for exponential Levy models and HARA utilities in presence of illiquid asset in portfolio. This illiquid asset is modelled by an option of European type on another risky asset which is correlated with the first one. Under some hypothesis on Levy processes, we give the expressions of information processes figured in maximum utility formula. As applications, we consider Black-Scholes models with correlated Brownian Motions, and also Black-Scholes models with jump part represented by Poisson process. |
| Keywords: | utility maximisation, exponential Levy models, f-divergence minimal martingale measure, dual approach, entropy, Kullback-Leibler information, information processes |
| Date: | 2016–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01388047&r=upt |
| By: | Vladimir Ivanovitch Danilov (CEMI - Central Economic Mathematical Institute - Russian Academy of Sciences); Ariane Lambert-Mogiliansky (PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique); Vassili Vergopoulos (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics) |
| Abstract: | Quantum cognition is a recent and rapidely growing field. In this paper we developan expected utility theory in a context of non-classical (quantum) uncertainty. We replace the classical state space with a Hilbert space which allows introducing the concept of quantum lottery. Within that framework we formulate sufficient and necessary axioms on preferences over quantum lotteries to establish a representation theorem. We show that demanding the consistency of choice behavior conditional on new information is equivalent to the von Neuman-Luders postulate applied to beliefs. In our context, dynamic consistency is shown not to secure Savage's Sure Thing Principle (in its dynamic version). Finally, we discuss the interpretation and value of our results for rationality and behavioral economics. |
| Keywords: | Quantum cognition |
| Date: | 2016–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-01324046&r=upt |
| By: | OUATTARA, Aboudou; DE LA BRUSLERIE, Hubert |
| Abstract: | The discounted utility theory is a cornerstone of financial theory, particularly in inter-temporal asset pricing and portfolio management. This theory questioning has opened a whole field of research in psychology, economics, and management, and has undergone several enhancements recently. Its violation seems widely established and opened the way for the building of a more efficient framework to understand the individual time preferences. One improvement is related to the refining of the knowledge on the psychological discount function that underlies inter-temporal choices. In fact, an individual’s time preferences may be characterized by various discount functions such as the exponential, Hernstein, Harvey, proportional, Laibson, Rachlin, hyperbolic and generalized hyperbolic discount functions. Empirical validation of these proposed psychological discount rate term structures to explain individual preferences and the distribution of their parameters in a given population has been the subject of a number of recent studies. These researches have insufficiently question the problem of the validity of the proposed function on a given population. The aim of this research is to empirically study the shape and parameters of psychological discount functions that characterized a given population. Based on the data collected through an experimental study, the violation of the discounted utility theory is confirmed, which means that time preferences could not be characterized by an exponential discount function. This finding is consistent with other empirical studies and shows that the population is characterized by a decreasing impatience. In addition, it shows that the population is characterized by a heterogeneity of the psychological discount functions. |
| Keywords: | discounted utility theory, psychological discount function, experimental study |
| JEL: | C81 C91 D11 |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75111&r=upt |
| By: | Zhang, Linjia; Botti, Laurent; Petit, Sylvain |
| Abstract: | Economic characteristics of home countries can cause considerable variations in the tourism demand. For example, the average level of expenditure per tourist varies from one origin to another and these variations may alter overtime. Thus different tourist nationalities are associated with different level of expenditures and risks. Therefore strategies aimed at minimizing the variations may become an important issue for the policy makers. In this paper, we aim to use the productivity measurement theory in a mean-variance space to a French region (Nord Pas-de-Calais) by introducing the utility function in a mean-variance framework. With this method, we can calculate the optimal portfolio share for each origin and give some useful political advices to the policy decision makers to improve the performance of the tourist sector. |
| Keywords: | Productivity measurement; Mean-variance; Tourism efficiency; Efficiency decomposition; Utility function; Nord Pas-de-Calais |
| JEL: | C61 C67 L83 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75080&r=upt |
| By: | Marek Kapicka; Julian Neira |
| Abstract: | We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences. The optimal policies balance redistribution across agents, insurance against human capital shocks, and incentives to learn and work. In the optimum, i) if utility is separable in labor and learning effort, the inverse labor wedge follows a random walk, ii) if the utility is not separable then the “no distortion at the top” result does not apply, and iii) quantitatively, high-ability agents face very risky consumption while lowability agents are insured. The welfare gains from switching to an optimal tax system are large. |
| Keywords: | optimal taxation; income taxation; human capital; |
| JEL: | E6 H2 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp553&r=upt |
| By: | João V. Ferreira (Aix-Marseille University (Aix-Marseille School of Economics), CNRS, & EHESS) |
| Abstract: | The common interpretation given to choice behavior that satisfies the traditional revealed preference axioms is that it results from the maximization of a single preference. We show that choice data alone does not enable one to rule out the possibility that the choice behavior that satisfies the revealed preference axioms is instead the result of the aggregation of a collection of distinct preferences. In particular, we show that any ordering is observationally equivalent to a majoritarian aggregation of a collection of distinct dichotomous orderings. We also show that any ordering is observationally equivalent to a Borda’s aggregation of a collection of distinct linear orderings. |
| Keywords: | Revealed preference theory, Rationalization, Dichotomous preferences, Aggregation rules, Choice data |
| JEL: | B4 D01 D71 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1639&r=upt |
| By: | Eric Danan (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique); Thibault Gajdos (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - CNRS - Centre National de la Recherche Scientifique); Brian Hill (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS - Centre National de la Recherche Scientifique); Jean-Marc Tallon (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We propose and operationalize normative principles to guide social decisions when individuals potentially have imprecise and heterogeneous beliefs, in addition to conflicting tastes or interests. To do so we adapt the standard Pareto principle to those preference comparisons that are robust to belief imprecision and characterize social preferences that respect this robust principle. We also characterize a suitable restriction of this principle. The former principle provides stronger guidance when it can be satisfied; when it cannot, the latter always provides minimal guidance. |
| Keywords: | Unambiguous preferences,Pareto dominance,Prefer-ence aggregation,Social choice,Uncertainty |
| Date: | 2015–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseose:hal-01241819&r=upt |
| By: | Glenn Boyle (University of Canterbury); Gerald Ward |
| Abstract: | We investigate the value of additional, but imperfect, investment information using data from a singular source: auctions of yearling racehorses. Horse breeders possess superior information about their own horses and, in the setting we examine, have strong financial incentives to buy the best of these back at auction. Despite this, those they choose to repurchase subsequently perform significantly worse on average, earning 30% less at the racetrack than horses purchased by outsiders. This puzzling finding cannot be explained by differences in horse risk or breeder abilities, or by non-standard preferences or behavioral biases. Some weak evidence suggests that it partly reflects opportunity cost differences, but the primary puzzle remains. A little knowledge can apparently be dangerous, although the exact mechanism by which this occurs is unclear. |
| Keywords: | information; auctions; racehorses; IPOs |
| JEL: | G02 G11 G14 L83 D44 |
| Date: | 2016–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:16/29&r=upt |