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Book part
Publication date: 3 June 2008

Nathaniel T. Wilcox

Choice under risk has a large stochastic (unpredictable) component. This chapter examines five stochastic models for binary discrete choice under risk and how they combine with…

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Choice under risk has a large stochastic (unpredictable) component. This chapter examines five stochastic models for binary discrete choice under risk and how they combine with “structural” theories of choice under risk. Stochastic models are substantive theoretical hypotheses that are frequently testable in and of themselves, and also identifying restrictions for hypothesis tests, estimation and prediction. Econometric comparisons suggest that for the purpose of prediction (as opposed to explanation), choices of stochastic models may be far more consequential than choices of structures such as expected utility or rank-dependent utility.

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Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

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Book part
Publication date: 23 October 2023

Nathaniel T. Wilcox

The author presents new estimates of the probability weighting functions found in rank-dependent theories of choice under risk. These estimates are unusual in two senses. First…

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The author presents new estimates of the probability weighting functions found in rank-dependent theories of choice under risk. These estimates are unusual in two senses. First, they are free of functional form assumptions about both utility and weighting functions, and they are entirely based on binary discrete choices and not on matching or valuation tasks, though they depend on assumptions concerning the nature of probabilistic choice under risk. Second, estimated weighting functions contradict widely held priors of an inverse-s shape with fixed point well in the interior of the (0,1) interval: Instead the author usually finds populations dominated by “optimists” who uniformly overweight best outcomes in risky options. The choice pairs used here mostly do not provoke similarity-based simplifications. In a third experiment, the author shows that the presence of choice pairs that provoke similarity-based computational shortcuts does indeed flatten estimated probability weighting functions.

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Models of Risk Preferences: Descriptive and Normative Challenges
Type: Book
ISBN: 978-1-83797-269-2

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Book part
Publication date: 23 October 2023

Glenn W. Harrison and J. Todd Swarthout

We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset…

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We take Cumulative Prospect Theory (CPT) seriously by rigorously estimating structural models using the full set of CPT parameters. Much of the literature only estimates a subset of CPT parameters, or more simply assumes CPT parameter values from prior studies. Our data are from laboratory experiments with undergraduate students and MBA students facing substantial real incentives and losses. We also estimate structural models from Expected Utility Theory (EUT), Dual Theory (DT), Rank-Dependent Utility (RDU), and Disappointment Aversion (DA) for comparison. Our major finding is that a majority of individuals in our sample locally asset integrate. That is, they see a loss frame for what it is, a frame, and behave as if they evaluate the net payment rather than the gross loss when one is presented to them. This finding is devastating to the direct application of CPT to these data for those subjects. Support for CPT is greater when losses are covered out of an earned endowment rather than house money, but RDU is still the best single characterization of individual and pooled choices. Defenders of the CPT model claim, correctly, that the CPT model exists “because the data says it should.” In other words, the CPT model was borne from a wide range of stylized facts culled from parts of the cognitive psychology literature. If one is to take the CPT model seriously and rigorously then it needs to do a much better job of explaining the data than we see here.

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Models of Risk Preferences: Descriptive and Normative Challenges
Type: Book
ISBN: 978-1-83797-269-2

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Book part
Publication date: 3 June 2008

Glenn W. Harrison and E. Elisabet Rutström

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths…

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We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.

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Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

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Book part
Publication date: 15 October 2008

Elena Bárcena and Luis J. Imedio

Purpose: This paper studies the Bonferroni (B) and De Vergottini (V) inequality measures, evaluating their differences and similarities, both normatively and statistically.Design…

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Purpose: This paper studies the Bonferroni (B) and De Vergottini (V) inequality measures, evaluating their differences and similarities, both normatively and statistically.

Design: We highlight the similarities of these two indices with the well-known Gini index (G) and use the AKS [Atkinson (1970), Kolm (1976), Sen (1973)] approach to relate social welfare functions and inequalities indices. In addition, we propose two formulations for relative deprivation, alternative to Yitzhaki (1979) and Hey and Lambert (1980) approach.

Findings: The three indices belong to the same family and introduce different and, in some sense, complementary value judgments in the measurement of inequality and welfare; each of them evaluates in a different way the local inequality in the income distribution. The three indices present inequality aversion (satisfy the Pigou-Dalton Principle of Transfers). But only B satisfies the Principle of Positional Transfer Sensitivity. The three absolute indices are interpreted as measures of the mean social deprivation starting from different definitions of individual deprivation.

Originality: The originality of this paper lies in the joint use of the three indices in the measurement of inequality, welfare, and deprivation. We apply these indices to obtain rankings of the European Union countries, using the European Community Household Panel data (2000). A sensitivity analysis of the rankings to different equivalence scales is also included.

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Inequality and Opportunity: Papers from the Second ECINEQ Society Meeting
Type: Book
ISBN: 978-1-84855-135-0

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Book part
Publication date: 1 January 2014

Rolf Aaberge and Ugo Colombino

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Handbook of Microsimulation Modelling
Type: Book
ISBN: 978-1-78350-570-8

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Book part
Publication date: 19 January 2005

Jos van Ommeren

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Urban Dynamics and Growth: Advances in Urban Economics
Type: Book
ISBN: 978-0-44451-481-3

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Book part
Publication date: 23 October 2023

Glenn W. Harrison and Don Ross

Behavioral economics poses a challenge for the welfare evaluation of choices, particularly those that involve risk. It demands that we recognize that the descriptive account of…

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Behavioral economics poses a challenge for the welfare evaluation of choices, particularly those that involve risk. It demands that we recognize that the descriptive account of behavior toward those choices might not be the ones we were all taught, and still teach, and that subjective risk perceptions might not accord with expert assessments of probabilities. In addition to these challenges, we are faced with the need to jettison naive notions of revealed preferences, according to which every choice by a subject expresses her objective function, as behavioral evidence forces us to confront pervasive inconsistencies and noise in a typical individual’s choice data. A principled account of errant choice must be built into models used for identification and estimation. These challenges demand close attention to the methodological claims often used to justify policy interventions. They also require, we argue, closer attention by economists to relevant contributions from cognitive science. We propose that a quantitative application of the “intentional stance” of Dennett provides a coherent, attractive and general approach to behavioral welfare economics.

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Models of Risk Preferences: Descriptive and Normative Challenges
Type: Book
ISBN: 978-1-83797-269-2

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Book part
Publication date: 25 January 2023

Ivica Urban

Various indicators of income inequality and social welfare can be obtained simply by using the Gini index and the mean income of the population. This paper reviews existing…

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Various indicators of income inequality and social welfare can be obtained simply by using the Gini index and the mean income of the population. This paper reviews existing indicators and presents several new indicators of this kind. While contemporary researchers seem to be preoccupied with relative inequality, this paper advocates for using intermediate inequality views and supplementing inequality rankings of countries with rankings based on social welfare. Empirical analysis, performed for 36 European countries, demonstrates such an approach’s advantages.

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Book part
Publication date: 15 January 2010

Bruno Lanz, Allan Provins, Ian J. Bateman, Riccardo Scarpa, Ken Willis and Ece Ozdemiroglu

We investigate discrepancies between willingness to pay (WTP) and willingness to accept (WTA) in the context of a stated choice experiment. Using data on customer preferences for…

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We investigate discrepancies between willingness to pay (WTP) and willingness to accept (WTA) in the context of a stated choice experiment. Using data on customer preferences for water services where respondents were able to both ‘sell’ and ‘buy’ the choice experiment attributes, we find evidence of non-linearity in the underlying utility function even though the range of attribute levels is relatively small. Our results reveal the presence of significant loss aversion in all the attributes, including price. We find the WTP–WTA schedule to be asymmetric around the current provision level and that the WTP–WTA ratio varies according to the particular provision change under consideration. Such reference point findings are of direct importance for practitioners and decision-makers using choice experiments for economic appraisal such as cost–benefit analysis, where failure to account for non-linearity in welfare estimates may significantly over- or under-state individual's preferences for gains and avoiding losses respectively.

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Choice Modelling: The State-of-the-art and The State-of-practice
Type: Book
ISBN: 978-1-84950-773-8

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