1,721,041 research outputs found
Recursive Smooth Ambiguity Preferences.
Full text linkThis paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in [P. Klibanoff, M. Marinacci, S. Mukerji, A smooth model of decision making under ambiguity, Econometrica 73 (6) (2005) 1849–1892]. A key feature of the model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. In applications one may thus specify/vary these two characteristics independent of each other, thereby facilitating richer comparative statics and modeling flexibility than possible under other models which accommodate ambiguity sensitive preferences. Another key feature is that the preferences are dynamically consistent and have a recursive representation. Therefore techniques of dynamic programming can be applied when using this model
A Smooth Model of Decision Making under Ambiguity
No full textWe propose and characterize a model of preferences over acts such that the decision maker prefers act f to act g if and only if E μ φ( E π u○f) ⩾ E μ φ( E π u○g), where E is the expectation operator, u is a von Neumann-Morgenstern utility function, φis an increasing transformation, and μis a subjective probability over the set Πof probability measures πthat the decision maker thinks are relevant given his subjective information. A key feature of our model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. We show that attitudes toward pure risk are characterized by the shape of u, as usual, while attitudes toward ambiguity are characterized by the shape of φ. Ambiguity itself is defined behaviorally and is shown to be characterized by properties of the subjective set of measures Π. One advantage of this model is that the well-developed machinery for dealing with risk attitudes can be applied as well to ambiguity attitudes. The model is also distinct from many in the literature on ambiguity in that it allows smooth, rather than kinked, indifference curves. This leads to different behavior and improved tractability, while still sharing the main features (e.g., Ellsberg's paradox). The maxmin expected utility model (e.g., Gilboa and Schmeidler (1989)) with a given set of measures may be seen as a limiting case of our model with infinite ambiguity aversion. Two illustrative portfolio choice examples are offered. Copyright The Econometric Society 2005.
On the Smooth Ambiguity Model: A Reply
Full text linkWe …find that Epstein (2010)'s Ellsberg-style thought experiments pose, contrary to his claims, no paradox or difficulty for the smooth ambiguity model of decision making under uncertainty developed by Klibanoff, Marinacci and Mukerji (2005). Not only are the thought experiments naturally handled by the smooth ambiguity model, but our reanalysis shows that they highlight some of its strengths compared to models such as the maxmin expected utility model (Gilboa and Schmeidler, 1989). In particular, these examples pose no challenge to the model's foundations, interpretation of the model as a¤ording a separation of ambiguity and ambiguity attitude or the potential for calibrating ambiguity attitude in the model
Definitions of ambiguous events and the smooth ambiguity model
Full text linkAmbiguity, Uncertainty, Knightian uncertainty, Ambiguity aversion, Uncertainty aversion, Ellsberg paradox, D800, D810,
Essays in microeconomics
Full text linkThis thesis consists of two theoretical chapters, focusing on dynamic games, and one empirical chapter. In Chapter 1, I consider a repeated game in which, due to imperfect monitoring, no collusion can be sustained. I add a self-interested monitor who commits to generating an imperfect private signal of firmsâ actions and sends a public message. The monitor makes an offer specifying the precision of the signal generated and the amount to be paid in return. I show that with low monitoring cost, collusive equilibria exist. In the monitor's favorite collusive equilibrium, firmsâ payoffs are decreasing in the discount factor. My model helps explain the cartel agreements between the mafia and firms in legal industries in Italy and America.
In Chapter 2, I consider a bargaining game with two types of players â rational and stubborn. Rational players choose demands at each point in time. Stubborn players are restricted to choose a bargaining strategy from a proper subset of strategies available to rational players. In the simplest case, stubborn players are restricted to choose from the set of "insistent" strategies that always make the same demand and never accept anything less. However, their initial choice of demand is unrestricted. I characterize the equilibria in this game, showing how the flexibility of the stubborn type changes equilibrium predictions.
Chapter 3 estimates the effect of longer prison sentences on criminal asset recovery, using administrative, cross-sectional data on confiscation orders in the UK. Confiscation orders request convicted offenders to pay the value of their criminal assets, and specify a prison sentence to be served in the case of non-payment. Using a fuzzy RDD, I exploit discontinuous changes in the legal maximum of this prison sentence. There is evidence that longer prison sentences incentivize offenders to pay.</p
Insurance design for developing countries
Full text linkOver the last ten years there has been a renewed interest in providing agricultural insurance in developing countries. However, voluntary demand for unsubsidised insurance products has been low, particularly from the poorest farmers.Chapter One presents a model of rational demand for hedging products, where there is a risk of contractual nonperformance. Demand is characterised and bounded for risk averse and decreasing absolute risk averse decision makers. For constant absolute and relative risk averse utility functions, demand is hump-shaped in the degree of risk aversion when the price is actuarially unfair, first increasing then decreasing, and either decreasing or decreasing-increasing-decreasing in risk aversion when the price is actuarially favourable. The apparently low level of demand for consumer hedging instruments, particularly from the most risk averse, is explained as a rational response to deadweight costs and the risk of contractual nonperformance. A numerical example is presented which suggests that some of the unsubsidised weather derivatives currently being designed for and marketed to poor farmers may in fact be poor products.Chapter Two presents experimental evidence collected from a framed microinsurance lab experiment using poor subjects in rural Ethiopia. In line with the theoretical model of Chapter One, demand for actuarially unfair index insurance is hump-shaped in wealth, first increasing then decreasing. In contrast with recent field experiments where it is not possible to demonstrate that low demand for indexed insurance is `too low', use of a laboratory experiment with an objectively known joint probability distribution allows normative statements to be made about the observed level of demand. The observed level of demand for index insurance in the experiment is higher than the decreasing absolute risk averse upper bound of Chapter One, suggesting that subjects bought `too much' index insurance.Chapter Three presents a vision of insurance design for the poor. Technically optimal arrangements involve insurance providers, such as microinsurers or governments, acting as reinsurer to groups of individuals who have access to cheap information about each other, such as extended families or members of close-knit communities, who in turn offer mutual insurance to each other
Essays in behavioural economics
Full text linkThe thesis consists of three stand-alone essays.
Defaults are influential, cheap to change, and therefore of great interest to policymakers. However, it is still unclear what explains their influence. Optimal Defaults and Uncertainty presents a model in which uncertainty contributes to default inertia: decision makers may be content to stick with the default and avoid the costs of learning their optimal decision. The socially optimal default policy I find differs significantly from optimal policy in models where procrastination alone drives default inertia. I show that alternative policy measures may be more effective in improving welfare, and so the effectiveness of defaults may be more limited than previous models suggest.
In Screening Salient Thinkers, I explore a model of second-degree price discrimination in which consumers with context-dependent preferences choose from a menu of price-quality bundles. Specifically, the range of prices and qualities in the menu determines the weight that consumers give to the two attributes when they evaluate bundles. âFocusing thinkersâ place more weight on the attribute that varies the most within the menu; for ârelative thinkersâ the opposite is true. The monopolist exploits both types of bounded rationality. In the focusing case the cost of asymmetric information is directly reduced; with relative thinkers the monopolist can use a âdecoy goodâ to extract higher revenues from all consumers.
Finally How Long Is Now? explores an important degree of freedom in models of present-biased preferences: when does the present end and the future begin? First I present evidence that illustrates how economists have used this degree of freedom to explain behaviour in a variety of different contexts. Second, using a novel, between-subjects experimental design, I test a hypothesis that endogenises the cut-off between the present and the future: the âas soon as possibleâ effect. The effect predicts that the soonest option in a menu fixes the present horizon and implies a time-specific form of menu dependence. The experimental data collected does not support the hypothesis and this result appears robust to a number of analytical approaches.</p
Thesis on behavioural asset pricing and portfolio choice
Full text linkThis thesis presents three papers in the field of behavioural financial economics and financial econometrics.
The first paper, entitled "Optimistic versus PessimisticâOptimal Judgemental Bias with Reference Point" develops a model of reference-dependent assessment of subjective beliefs in which the loss-averse people optimally choose expectation as the reference point to balance the current felicity from the optimistic anticipation and the future disappointment from the realization. The choice of over-optimism or over-pessimism depends on the real chance of success and optimistic decision makers prefer receiving early information. In the portfolio choice problem, pessimistic investors tend to trade conservatively. However, they might trade aggressively if they are sophisticated enough to recognise the biases as low expectation can reduce their fear of loss.
The second paper, entitled "Information and Dynamic Trading with Gambler's Fallacy", develops a multi-period stock trading model in which there are two types of investorsâ"rational" type and "gambler's fallacy" type, both observe the public signal about the fundamental value each period. The rational investor holds correct beliefs on the stochastic process of the signal, whereas the gambler's fallacy investor falsely believes that the sequence of signals should exhibit systematic reversals. Both types of investors trade against each other to speculate the future price changes, based on their inferences about the fundamental value. This paper explores the competitive equilibrium, in which both types of investors have model consistent expectations adjusted for the heterogeneity in their beliefs about the signal generating process. The thesis examines the dynamics of prices, returns, optimal portfolios and trading volumes in reaction to the information flow. Consistent with empirical evidence, the market in this model exhibits short-run momentum and long-run reversal. It is also demonstrated that the equilibrium price is more close to the valuation of the gambler's fallacy type.
Finally, the third empirical paper entitled "Regime Switching in Financial Market and Portfolio Choice" considers a variety of regime switching models with time varying transition probabilities for the joint distribution of stocks and bonds returns. Paper results support a two-regime univariate model for stocks with ISM and P/E ratio as leading predictors for the transition probabilities and support the fixed transition probability model for univariate distribution of bond returns. Under joint distribution assumption, the model selects a three regime model with ISM, unemployment rate and P/E ratio as predictors for the time varying transition probabilities. Even though both fixed and time varying transition probability models identify three regimes in the financial market, however, the time varying transition probability model provides better out of sample predictions, based on the regime-dependent portfolio performance.
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Foundations of ambiguity and economic modeling.
Full text linkAre foundations of models of ambiguity-sensitive preferences too flawed to be usefully applied to economic models? Al-Najjar and Weinstein (2009) say such is indeed the case. In this paper, first, we point out that many of the key arguments by Al-Najjar and Weinstein do not apply to quite a few of the ambiguity preference models of more recent vintage, and therefore to that extent do not undermine the foundational aspects or applicability of ambiguity models in general. Second, we argue the focus in that paper on Ellsberg examples is an overly narrow concern; the Ellsberg examples have their uses but they are not the best context to understand why reasonable real-world agents may find acting with ambiguity-sensitive preferences normatively or prescriptively appealing. Finally, normative considerations aside, we submit that Al-Najjar and Weinstein are unduly dismissive of the power of such preferences to provide illuminating positive analyses of economic phenomena
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