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on Utility Models and Prospect Theory |
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Issue of 2018‒11‒26
thirteen papers chosen by |
| By: | Gehrig, Thomas; Sögner, Leopold; Westerkamp, Arne |
| Abstract: | The implementation of parametric portfolio policies as introduced by Brandt, Santa Clara and Valkanov (RFS 2009) may run into empirical problems. For example, expected utility based on monthly returns of S&P-500 data from 1995-2013 turns non-monotonic for moderate levels of (constant) risk aversion. We establish that in the leading case of constant relative risk aversion (CRRA) strong assumptions on the properties of the returns, the variables used to implement the parametric portfolio policy and the parameter space are necessary to obtain a well defined optimization problem. Without such refinements an interior maximum of the expected utility functional may not exist. We provide economic conditions on the domain and/or the utility functions that overcome such empirical problems and that guarantee the effectiveness of the approach. We illustrate the implications of our improvements by applying parametric portfolio policies to a large universe of stocks. |
| Keywords: | expected utility; portfolio policy; prospect theory; risk aversion |
| JEL: | C11 G11 G12 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13193&r=upt |
| By: | Robert Barro (Department of Economics, Harvard University); Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Oren Levintal (Department of Economics, University of Pennsylvania); Andrew Mollerus (Department of Economics, Harvard University) |
| Abstract: | A safe asset’s real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representative-agent version of this economy, the quantity of safe assets will be nil. With heterogeneity in coefficients of relative risk aversion, safe assets can take the form of private bond issues from low-risk-aversion to high-risk-aversion agents. The model assumes Epstein-Zin/Weil preferences with common values of the intertemporal elasticity of substitution and the rate of time preference. The model achieves stationarity by allowing for random shifts in coefficients of relative risk aversion. We derive the equilibrium values of the ratio of safe to total assets, the shares of each agent in equity ownership and wealth, and the rates of return on safe and risky assets. In a baseline case, the steady-state risk-free rate is 1.0% per year, the unlevered equity premium is 4.2%, and the quantity of safe assets ranges up to 15% of economy-wide assets (comprising the capitalized value of GDP). A disaster shock leads to an extended period in which the share of wealth held by the low-risk-averse agent and the risk-free rate are low but rising, and the ratio of safe to total assets is high but falling. In the baseline model, Ricardian Equivalence holds in that added government bonds have no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowding-out coefficient for private bonds with respect to public bonds is not 0 or -1 but around -0.5, a value found in some existing empirical studies. |
| Keywords: | Safe assets, risk premium, risk-free rate, heterogeneous agents |
| JEL: | E21 G12 |
| Date: | 2017–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:17-008&r=upt |
| By: | Epper, Thomas; Fehr-Duda, Helga |
| Abstract: | Standard economic models view risk taking and time discounting as two independent dimensions of decision makers’ behavior. However, mounting experimental evidence demonstrates the existence of robust and systematic interaction effects. There are striking parallels in patternsof risk taking and time discounting behavior, which suggests that there is a common underlying force driving these interactions. Here we show that decision makers’ anticipationof something going wrong in the future conjointly with their proneness to probability weighting generates a unifying framework for explaining seven puzzling regularities: delay-dependent risk tolerance, aversion to sequential resolution of uncertainty, preferences for resolution timing, hyperbolic discounting, subadditive discounting, the differential discounting of risky and certain outcomes, and the order dependence of prospect valuation. Finally, we discuss the implications of our framework for understanding real-world behavior, such as the coexistence of underinsuring and overinsuring. |
| Keywords: | Risk preferences, time preferences, time-dependent risk tolerance, decreasing impatience, timing and frequency of uncertainty resolution, probability-dependent risk attitudes, over-/under-insurance. |
| JEL: | D01 D81 D91 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2018:12&r=upt |
| By: | Liu, S.; Duan, J.; Van Kooten, G.C. |
| Abstract: | Beginning in the 1960s, agricultural economists used mathematical programming methods to examine producers responses to policy changes. Today, positive mathematical programming (PMP) employs observed average costs and crop allocations to calibrate a nonlinear cost function, thereby modifying a linear objective function to a nonlinear one to replicate observed allocations. The standard PMP approach takes into account producers risk aversion, which is not a very satisfying outcome because it intricately entangles the cost parameters and the producer s attitudes biophysical aspects of production and human behavior are intertwined so that one cannot study the impact of policy on one in the absence of the other. Several approaches that calibrate both the risk coefficient and cost function parameters have been proposed. In this paper, we discuss two methods mentioned in literature one based on constant absolute risk aversion (exponential utility function) and the other on decreasing absolute risk aversion (logarithmic utility function). We compare these methods to an approach that employs maximum entropy method. Then we use historical data from a region in Alberta s southern grain belt to compare the different outcomes to which the three approaches lead. We find that the latter approach is robust and easier to employ. Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277475&r=upt |
| By: | Jan Hausfeld; Sven Resnjanskij |
| Abstract: | We investigate the trade-off between the opportunity costs of decisions and their quality in a simple model. In a lab experiment, we introduce exogenous variation in the opportunity costs of time. Contrary to claims in the previous literature, we show that using more time when making small-stake decisions does not indicate irrational behavior, and neither does a positive correlation between decision time and the probability of making mistakes. Such behavior is compatible with rational decisionmaking and our causal experimental evidence and, hence, does not imply that people behave fundamentally irrational when making observable decision errors under risk. |
| Keywords: | decision under risk, time constraints, opportunity costs, rational behavior, lab experiment, structural estimation, drift diffusion model |
| JEL: | C91 D01 D81 D83 D91 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ifowps:_269&r=upt |
| By: | Raffaelli, R.; Menapace, L. |
| Abstract: | Indirect questioning (IQ), i.e., asking respondents to predict the behavior of others, has been employed in stated preference studies as WTP elicitation technique. This technique, also referred to as Inferred Valuation, represents a promising approach for reducing hypothetical bias when it is not possible to sell actual goods to participants and when the social desirability bias is a potential problem (e.g., preferences for sustainable food attributes). To date, several issues associated to the use of IQ have not been adequately investigated. We carried out a Discrete Choice Experiment on field to verify the effects on estimated WTPs of: i) different IQ framing, ii) monetary incentives associated to predictions; and iii) the order of presentation. First, by employing two different question formats (e.g. asking to predict others behavior in a real market situation or in a hypothetical situation) we uncover how respondents are able to anticipate the tendency of others to provide socially desirable answers. Second, monetary incentives create a rewarding environment that indirectly affects WTPs obtained from direct questions. Third, we uncover a potential debiasing effect on WTPs of asking respondents to make predictions about others before stating their own preferences, which could have interesting implications for practitioners. Acknowledgement : |
| Keywords: | Research Methods/ Statistical Methods |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277039&r=upt |
| By: | Zhigang, X.; Zongli, Z.; Funing, Z.; Junfei, B. |
| Abstract: | With household disposable income increase, the proportion of food away from home (FAFH) consumption rises rapidly in the total household food consumption. Consumer s plate waste has attracted increasing public, academic, and political attention in recent years. In order to understand the reason that cause plate clearly, this empirical study sheds light on the effect of preference for food variety and average portion size on the plate waste using survey data from 1340 tables of 161 restaurants in Beijing and Lhasa. The key finding suggests that income increase leads more preference for food variety when consumer dining out; and we verify that a consumer is more likely to waste food when variety preference increase by using dining reason as an instrument and average portion size of restaurant increase. Our result implys that the restaurant should reduce the average portion size of dish with residents' income increases, which can reduce the consumer s plate waste. This paper introduces the preference for food variety into the utility function, which makes the utility function of residents FAFH more perfect and more realistic, and we introduce an order decision into the analysis framework, which constitutes a two-step decision to plate waste. Acknowledgement : |
| Keywords: | Research Methods/ Statistical Methods |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:276951&r=upt |
| By: | Ostermair, Christoph |
| Abstract: | So far, "salience theory of choice under risk" has been mainly applied to situations of risk rather than to those of uncertainty. In this paper, we show that salience theory provides the prediction that Allais paradoxes should never occur in the context of uncertainty. A finding which contra-dicts the scarce evidence existing up to now, and which indicates that further research on the topic is necessary. |
| Keywords: | Models of decision-making under risk and uncertainty,Allais paradox,Independence axiom,Salience theory |
| JEL: | D81 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ubwwpe:20182&r=upt |
| By: | Marco M. Sorge (Università di Salerno, University of Göttingen and CSEF) |
| Abstract: | Rational expectations (RE) frameworks featuring informational constraints are becoming increasingly popular in macroeconomic research. A recent strand of literature has explored the analytics of RE models with informational subperiods, in which the occurrence of exogenous shocks is period-specific and decision makers thus condition their own choices and expectations upon a sequence of nested information sets (timing restrictions). Assuming the unrestricted (full information) RE model satisfies saddle-path stability, this paper provides (i) necessary and sufficient conditions for existence of an uncountably infinite set of linearly perturbed solutions to its restricted (informationally constrained) counterpart, and (ii) an algorithm for computing the full set of (sunspot) solutions when equilibrium indeterminacy occurs. |
| Keywords: | Rational expectations, Timing restrictions, Perturbation theory |
| JEL: | C62 C63 |
| Date: | 2018–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:514&r=upt |
| By: | Xi Chen; Yining Wang; Yuan Zhou |
| Abstract: | In this paper, we study the dynamic assortment optimization problem under a finite selling season of length $T$. At each time period, the seller offers an arriving customer an assortment of substitutable products under a cardinality constraint, and the customer makes the purchase among offered products according to a discrete choice model. Most existing work associates each product with a real-valued fixed mean utility and assumes a multinomial logit choice (MNL) model. In many practical applications, feature/contexutal information of products is readily available. In this paper, we incorporate the feature information by assuming a linear relationship between the mean utility and the feature. In addition, we allow the feature information of products to change over time so that the underlying choice model can also be non-stationary. To solve the dynamic assortment optimization under this changing contextual MNL model, we need to simultaneously learn the underlying unknown coefficient and makes the decision on the assortment. To this end, we develop an upper confidence bound (UCB) based policy and establish the regret bound on the order of $\widetilde O(d\sqrt{T})$, where $d$ is the dimension of the feature and $\widetilde O$ suppresses logarithmic dependence. We further established the lower bound $\Omega(d\sqrt{T}/K)$ where $K$ is the cardinality constraint of an offered assortment, which is usually small. When $K$ is a constant, our policy is optimal up to logarithmic factors. In the exploitation phase of the UCB algorithm, we need to solve a combinatorial optimization for assortment optimization based on the learned information. We further develop an approximation algorithm and an efficient greedy heuristic. The effectiveness of the proposed policy is further demonstrated by our numerical studies. |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1810.13069&r=upt |
| By: | Carpentier, A.; Reboud, X. |
| Abstract: | The observed dependence of current crop production on chemical crop protection is largely due to economic and technological factors. High yield and specialized cropping systems require high crop protection levels and pesticides allow achieving such protection levels at reasonable (private) costs. The main aim of this article is to show that behavioral factors may reinforce the effects of these economic and technological factors on farmers considering pesticides the ultimate in crop protection. Choice mechanisms described by K?szegi and Rabin (2007) imply that individual attitudes toward a given risk are endogenous in the sense that they depend on the best available means to cope with this risk. Building on this extension of Prospect Theory, we show that farmers exhibit strong aversion toward crop health risks when pesticide prices are relatively low. Indeed, the cheaper the pesticides, the higher the crop protection levels farmers refer to when considering pesticide sprays, and the more they feel that choosing low crop protection levels entails unacceptable risk taking. Our analysis also suggests that pesticide prices play a more important role in farmers crop protection choices than previously recognized. In particular, we show that pesticide taxes would unambiguously reduce farmers pesticide uses, by reducing pesticide profitability as well as farmers aversion toward crop health risks. Acknowledgement : |
| Keywords: | Crop Production/Industries |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277528&r=upt |
| By: | Weltin, M.; Zasada, I. |
| Abstract: | Sustainable intensification (SI) of agriculture covers a broad range of practices that in an optimal combination should contribute to environmental protection as well as to the economic viability of farming. Farmers are likely to make a simultaneous adoption decision on a utility maximising set of SI practices. The aim of this study is to (i) detect which SI practices are adopted, (ii) analyse the influence of farmers characteristics as well as farm attributes on the adoption decision and (iii) evaluate whether the selection of different SI practices is interdependent. We draw on farm survey data from 2017. We use a SI conceptual framework that assigns practices to four fields of action (FoA) from farm to landscape level and land use to structural optimisation. Using multivariate probit modelling, we assess the determinants of adopting SI within each FoA, controlling for possible correlation of the adoption of practices across FoA. Results indicate that most farmers apply SI practices in a combined portfolio. Farmers are more likely to apply field-level interventions than SI practices that require regional cooperation. Decisions show dependence on each other with a tendency for complementarities and path dependencies in SI adoption. Acknowledgement : This research was financially supported by the European Commission under grant agreement 652615 and conducted in the context of the ERA-Net FACCE SURPLUS project VITAL, with the national funders NWO (Netherlands), BMBF (Germany), INIA (Spain), ANR (France). |
| Keywords: | Research Methods/ Statistical Methods |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:276982&r=upt |
| By: | garcia, juan manuel; alvarado enciso, alfredo |
| Abstract: | The demand behavior of the different goods and services is a key component that shapes the structure of an economy, and its analysis is economic policies, such as taxation and promotion of productive development. Within the many demand systems posed in the theoretical and empirical literature, the almost ideal demand systems (AIDS and QUAIDS) have properties consistent with the maximization of utility according to the consumer's neoclassical theory. In this paper, we estimate price elasticities of demand, cross price and income are estimated for large groups of goods and services in Peru from 2004 to 2014, using AIDS and QUAIDS models, based on data from household surveys, using the AIDS and QUAIDS. It is found that the values of price elasticities of demand are consistent with the literature. Likewise, it is determined that the services of care, health conservation, transportation and communications, leisure, entertainment, cultural services, and education and other services constitute luxury goods, although there is heterogeneity in the results when the analysis is done at a higher level of disaggregation. |
| Keywords: | AIDS QUAIDS demanda elasticidad precio |
| JEL: | D11 D12 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89282&r=upt |