examining the relationship between visual attention and stated preferences a discrete choice experiment using eye tracking abstract we examine the relationship between visual attention and stated preferences derived from a discrete choice experiment focussing on consumer preferences regarding country of origin food labels we employ a bayesian infinite mixture logit to derive results that reveal patterns of respondent heterogeneity that would not be captured assuming that random parameters take a specific distributional form our results reveal weak relationships between the eye tracking data our stated preference results and various attribute use questions although respondents with higher levels of visual attendance value specific attributes more highly the strength of the relationship is fairly weak therefore whilst we maintain that eye tracking is useful we argue that there needs to be greater clarity about the aims and purpose of using eye tracking in stated preference research

preference heterogeneity in experiments comparing the field and laboratory do laboratory experiments provide a reliable basis for measuring field preferences economists recognize that preferences can differ across individuals but only a few attempts have been made to elicit individual preferences for representative samples of a population in a particular geographical area region or country our primary objective is to directly compare estimates of preferences elicited from a convenience sample and the estimates for the wider population from which that sample is drawn we examine the strengths and weaknesses of laboratory and field experiments to detect differences in preferences over risk and time that are associated with standard observable characteristics of the individual

lottery choice incentives complexity and decision time this paper reports the results of an experiment on lottery choice in which decision cost is measured as decision making time a simple decision cost model motivates this measurement and the experiment and predicts relationships between incentive mechanism manipulations and decision making time which are borne out in the experiment the decision cost model also suggests that decisions will change in the face of the incentive manipulations in the experiment this suggestion is borne out in a complex decision making environment but not in a simple one specification tests demonstrate that observed changes in subjects behavior are not merely due to changes in subject specific error variance one may conclude from this that the payoff dominance problem is a real issue in complex decision making experiments copyright 1993 by royal economic society

the probable foundations of sustainabilism information energy and entropy based definition of capital homo sustainabiliticus and the need for a new gold abstract this conceptual interdisciplinary paper will start with an introduction to the new networked knowledge based global economy and the importance of intellectual and specifically human capital next an advanced definition of human and other forms of capital using information energy and entropy will be introduced this will be followed by a discussion of the premises framing the study of economics and will focus on the role of law in the economy afterwards the paper will suggest the addition of a new model of humans that should serve as the base for the concept of law the homo sustainabiliticus ensuing this discussion and consistent with the newly proposed definition of capital a proposal for a new currency new gold will be offered this proposal suggests viewing usable renewable energy knowledge and data as the most important assets for the 21st century and is seen as the building block for the new sustainabilistic economy

rational inattention dynamics inertia and delay in decision making we solve a general class of dynamic rational inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions the solution resembles the choice rule in a dynamic logit model but it is biased towards an optimal default rule that does not depend on the realized state we apply the general solution to the study of i the sunk cost fallacy ii inertia in actions leading to lagged adjustments to shocks and iii the tradeoff between accuracy and delay in decision making

international investment positions a cross sectional analysis abstract we explore some empirical properties of the level and composition of gross international investment positions in a cross section of countries we find that more open countries with larger domestic financial markets tend to hold greater quantities of foreign assets and liabilities there is some evidence that cross holdings are positively correlated with inflation volatility but negatively correlated with terms of trade volatility

the informational content of implied volatility implied volatility is widely believed to be informationally superior to historical volatility because it is the markets forecast of future volatility but for s p 100 index options the most actively traded contract in the united states we find implied volatility in aggregate and across subsamples separated by maturity and strike price implied volatility has virtually no correlation with future volatility and it does not incorporate the information contained in recent observed volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

consumption smoothing and the current account evidence for france 1970 1996 abstract this paper estimates a simple consumption smoothing model of the french current account and examines its capacity to predict recent developments in france s external performance the model views the current account as a buffer through which private agents can smooth consumption over time in response to temporary disturbances to output investment and government expenditure the empirical results indicate that the model performs well overall and predicts correctly the sharp turnaround in france s external accounts observed in the past 3 years a feature of the data that conventional models of trade flows based on income and relative price variables appear unable to explain

causes of capital flows in developing countries abstract this paper investigates the causes of capital flows in four developing countries mexico chile korea and malaysia using structural decomposition analysis it finds that the recent resurgence in capital movements is largely due to external reasons such as decreases in the world interest rate or recession in industrial countries domestic factors including country specific productivity shocks and demand shocks are relatively less important another interesting finding is that the fundamental causes of capital flows differ little across the countries under study these results suggest that developing countries need to pay attention to the financial arrangements associated with capital flows and to exchange rate policy as well as macroeconomic fundamentals to avoid financial crises in a world of increased capital mobility

decisions error and heterogeneity probabilistic choices or choice errors may play an important supporting role in shaping observed risky choices and a variety of restrictions on such choice probabilities play the role of identifying restrictions in empirical decision research we test six restrictions in the context of common ratio effect data for a general class of theories of risky choice two restrictions one for aggregate and one for individual data are supported but none of the heterogeneity restrictions that make the aggregate data model powerful survive scrutiny nor do estimable parametric versions of the individual data model there is room for new stochastic identifying restrictions in empirical decision research

the markowitz model of utility supplemented with a small degree of probability distortion as an explanation of outcomes of allais experiments over large and small payoffs and gambling on unlikely outcomes we show that in principal only a small degree of probability distortion is necessary for agents to exhibit the allais paradox we also show that the choices observed in the allais experiments employing small real payoffs cannot be explained by cumulative prospect theory without the assumption of low degrees of probability distortion that rule out gambling at unfair odds on all but the most extreme longshots in cpt given these points we show that the markowitz model of utility supplemented by a small degree of probability distortion can explain the majority choices involved allais experiments and other experiments as well as gambling at actuarially unfair odds

preference reversals under ambiguity preference reversals have been widely studied using risky or riskless gambles however little is known about preference reversals under ambiguity unknown probabilities subjects were asked to make a binary choice between ambiguous p bets big likelihood of giving small prize and ambiguous bets small likelihood of giving large prize and their willingness to accept was elicited subjects then performed the same two tasks with risky bets where the probability of winning for a given risky bet is the center of the probability interval of the corresponding ambiguous bet preference reversals are not only replicated under ambiguity but are even stronger than are those under risk this is due to higher elicited prices for the bet and lower elicited prices for the p bet under ambiguity than under risk this result can be explained by the shape of the weighting function for different levels of uncertainty and for different elicitation modes this paper was accepted by peter wakker decision analysis

the dual process drift diffusion model evidence from response times we introduce a model of response time and choice that borrows from two distinct psychological traditions as in dual process models rapid automatic decisions are qualitatively different from considered decisions as in the drift diffusion model delayed considered decisions occur when confidence hits a threshold level we conduct a simple experiment in which our hybrid model matches key properties of the data as our model predicts decision times are bimodal automatic decisions are of far lower quality than considered decisions and automatic decisions are more prevalent when prior information improves thereby raising their quality jel d83 d87 c91

international capital mobility what do national saving investment dynamics tell us abstract we interpret the relationship between national saving and investment in the long run as reflecting a solvency constraint and interpret the ease with which a country can run current account imbalances in the short run before it has to ultimately reverse the transaction at some future date to satisfy the solvency constraint as being positively related to the degree of international capital mobility we apply panel error correction techniques to data for 20 oecd countries from 1960 to 1999 we find that saving and investment display a long run cointegration relationship that is consistent with the interpretation that a long run solvency constraint is binding for each country over time however deviations from this long run equilibrium relation have become more persistent which suggests that capital mobility has increased

benefits of neuroeconomic modeling new policy interventions and predictors of preference neuroeconomics strives to use knowledge from neuroscience to improve models of decisionmaking here we introduce a biologically plausible drift diffusion model that is able to jointly predict choice behavior and response times across different choice environments the model has both normative and positive implications for economics first we consistently observe that decisionmakers inefficiently allocate their time to choices for which they are close to indifference we demonstrate that we can improve subjects welfare using a simple intervention that puts a time limit on their choices second response times can be used to predict indifference points and the strength of preferences

comments on information about bank risk in options prices the question being raised by the authors does implied volatility provide information about the risk of the bank swidler and wilcox 2002 is important and of great interest not only to the regulators but also to investors and risk managers indeed implied volatilities can be calculated every day and if they provide unambiguous information about bank risk then it is a useful variable to monitor therefore as a risk manager i have read this paper with great interest eq 1 in the paper constitutes the backbone of the argument developed by the authors r 2 g 2 r 2 1 where re and ra denote the volatility of equity and asset returns respectively and g is the elasticity of equity price to asset value eq 1 follows directly from merton s 1974 model where equity is a call option on the assets of the bank with the same maturity as the zero coupon debt which constitutes the only debt financing of the bank and with the strike price equal to the face value of the zero coupon debt two comments come to mind when looking at eq 1 firstly intuitively if the volatility of the asset returns increases then the probability of default may indeed increase keeping everything else constant why do i say may increase if the volatility increases this will increase the asset s beta assuming positive correlation with the market portfolio and hence the expected return an increase in the expected rate of return will in turn lower the probability of default hence the net effect of an increase in the asset volatility on the risk of default is

neuroeconomic foundations of economic choice recent advances neuroeconomics combines methods and theories from neuroscience psychology economics and computer science in an effort to produce detailed computational and neurobiological accounts of the decision making process that can serve as a common foundation for understanding human behavior across the natural and social sciences because neuroeconomics is a young discipline a sufficiently sound structural model of how the brain makes choices is not yet available however the contours of such a computational model are beginning to arise and given the rapid progress there is reason to be hopeful that the field will eventually put together a satisfactory structural model this paper has two goals first we provide an overview of what has been learned about how the brain makes choices in two types of situations simple choices among small numbers of familiar stimuli like choosing between an apple or an orange and more complex choices involving tradeoffs between immediate and future consequences like eating a healthy apple or a less healthy chocolate cake second we show that even at this early stage insights with important implications for economics have already been gained

a testable theory of imperfect perception we provide a new characterization of bayesian expected utility maximization the novel feature of the model is our separation of actions from prizes the signature of the resulting theory is the impossibility of raising utility by switching wholesale from one action to another we provide applications to robustness to the recovery of utility from choice data and to model

stochastic choice an optimizing neuroeconomic model a model is proposed in which stochastic choice results from noise in cognitive processing rather than random variation in preferences the mental process used to make a choice is nonetheless optimal subject to a constraint on available information processing capacity that is partially motivated by neurophysiological evidence the optimal information constrained model is found to oer a better t to experimental data on choice frequencies and reaction times than either a purely mechanical process model of choice the drift diusion

capital flows to developing countries this article focuses on the determinants of the large portfolio flows from the united states to latin american and asian countries during 1988 92 cointegration techniques reveal that both domestic and global factors explain bond and equity flows to developing countries and represent significant long run determinants of portfolio flows the article also investigates the dynamics of portfolio flows by estimating seemingly unrelated error correction models global and country specific factors are equally important in determining the long run movements in equity flows for both asian and latin american countries while global factors are much more important than domestic factors in explaining the dynamics of bond flows u s interest rates are a particularly important determinant of the short run dynamics of portfolio especially bond flows to developing countries

heterogeneity in risky choice behaviour in a broad population we analyse risk preferences using an experiment with real incentives in a representative sample of 1 422 dutch respondents our econometric model incorporates four structural parameters that vary with observed and unobserved characteristics utility curvature loss aversion preferences towards the timing of uncertainty resolution and the propensity to choose randomly rather than on the basis of preferences we find that all four parameters contribute to explaining choice behaviour the structural parameters are significantly associated with socio economic variables but it is essential to incorporate unobserved heterogeneity in each of them to match the rich variety of choice patterns in the data

gain loss framing in interdependent choice abstract framing influences choice however little is known about the underlying mechanisms behind framing effects we study gain loss framing in binary modified dictator games subjects choose the selfish option more often in the loss frame compared to the gain frame recording visual fixations with eye tracking we find that dictators focus more on their own outcomes when facing losses this suggests that losses to the own outcome are weighted more than losses to another player

addiction and cue triggered decision processes we propose a model of addiction based on three premises 1 use among addicts is frequently a mistake 2 experience sensitizes an individual to environmental cues that trigger mistaken usage 3 addicts understand and manage their susceptibilities we argue that these premises find support in evidence from psychology neuroscience and clinical practice the model is tractable and generates a plausible mapping between behavior and the characteristics of the user substance and environment it accounts for a number of important patterns associated with addiction gives rise to a clear welfare standard and has novel implications for policy

the common consequence effect testing a unified explanation of recent mixed evidence abstract the common consequence effect is perhaps the most investigated violation of expected utility theory and yet no single generalised expected utility model convincingly organises the experimental data this paper reports a test of a modified version of expected cardinality specific utility theory with boundary effects neilson w s 1992 economics letters 39 275 278 which can explain some recent mixed evidence without recourse to subjective probability weighting models the results do not convincingly support the boundary effect hypothesis and neither support the more usual probability weighting arguments but do indicate instability in preferences largely consistent with event splitting effects

the relation between implied and realized volatility abstract previous research finds the volatility implied by s p 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility in contrast we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications our results differ from previous studies because we use longer time series and nonoverlapping data a regime shift around the october 1987 crash explains why implied volatility is more biased in previous work

on the effectiveness of capital controls the experience of colombia during the 1990s abstract this paper analyzes the effectiveness of capital controls in colombia the evidence presented points towards a relative inability of the measures adopted to reduce the level of capital inflows nonetheless the evidence suggests that non remunerated deposits have been successful in inducing a recomposition of foreign liabilities in favor of long term maturities it is likely that this is a positive result as it has made the country less vulnerable to a reversal in capital flows in this sense controls may be viewed as an effective way of internalizing the negative externality imposed by short term maturities

when are person tradeoffs valid the person tradeoff pto is commonly used in health economic applications however to date it has no theoretical basis the purpose of this paper is to provide this basis from a set of assumptions that together justify the most common applications of the pto method our analysis identifies the central assumptions in pto measurements we test these assumptions in an experiment but find only limited support for the validity of the pto

understanding interdependence the macroeconomics of the open economy list of figureslist of tablesintroduction1the endogeneity of exchange rate regimes32exchange rate behavior under alternative exchange rate arrangements343panel one money for how many 844exchange rates prices and external adjustment in the united states and japan1075the dynamic optimizing approach to the current account theory and evidence1696international capital mobility in the 1990s2017a retrospective on the debt crisis2628trade liberalization in disinflation2919inflation and growth in an integrated approach31310panel the outlook for stabilization and reform in central and eastern europe36811international cooperation in the making of national macroeconomic policies where do we stand 39112the political economy of monetary union44813what do we need to know about the international monetary system 509conference participants531author index535subject index543

search costs and adaptive consumers short time delays do not affect choice quality using online price comparison and shopping platforms makes experiencing slow connections lags and waiting times for information an unfortunate reality however little attention has been paid to analyzing the effects of such delayed display of information on product choice behavior this article explores the effect of time delays in a multi attribute choice laboratory experiment by not providing information immediately when requested but after short time delays increasing these waiting times reduced the amount of information looked up but did not affect choice quality higher time delays made decision makers use more deliberate search processes whereas low time delays induced inefficient over searching

expected utility violations implications for agricultural and natural resource economics nomic toolkit they compare the dogged defense of eu by economists to that of a monty python character playing the role of a petstore owner disputing the state of an obviously dead parrot the shop owner goes through incredible machinations to avoid replacing the bird let us consider another analogy the behavior of a caged parrot can likely tell us very little about the behavior of parrots in the wild a biologist may want to incorporate the behavior of caged parrots into the study of wild birds but would undoubtedly need to be extremely careful about understanding the underlying differences in the opportunities and constraints faced by caged versus wild birds before inferring much about wild parrot behavior to some extent experimental violations of eu present us with the same problem as the hypothetical parrot biologist subjects in these risk experiments are in a setting and are completing tasks very different from the setting and tasks they face in their everyday economic and social context what is missing relates to the power of the rationality assumption discussed in friedman that relies not only on the person s skill but also on the feedback they receive from the market friedman s expert billiards players are selected by a market because of their skill in billiards and th se are the players who fit friedman s as if description 1 risk researchers should not ignore experimental data however before we eliminate eu we should more fully understand the underlying reasons for the experimental behavior that violates eu agricultural and natural resource economists are well suited to assess

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

the saving investment correlation puzzle is still a puzzle abstract a number of simulation studies claim to have solved the feldstein horioka puzzle by demonstrating that a high time series correlation between saving and investment naturally arises from business cycle shocks this paper uses panel data of saving and investment controlled for business cycle shocks to empirically test the significance of cyclical shocks productivity fiscal and the terms of trade shocks in explaining a high saving investment correlation the estimation results reveal that conventional aggregate shocks only partially explain the high saving investment correlation moreover country differences in the size of the gnp and the non traded sector do not significantly affect the saving investment correlation the saving investment correlation puzzle remains a puzzle after all

pavlovian processes in consumer choice the physical presence of a good increases willingness to pay this paper describes a series of laboratory experiments studying whether the form in which items are displayed at the time of decision affects the dollar value that subjects place on them using a becker degroot auction under three dif ferent conditions i text displays ii image displays and iii displays of the actual items we find that subjects willingness to pay is 40 61 percent larger in the real than in the image and text displays furthermore follow up experi ments suggest the presence of the real item triggers preprogrammed consum matory pavlovian processes that promote behaviors that lead to contact with appetitive items whenever they are available

experimental investigations of errors in decision making under risk abstract many if not all of the recent theories of decision making under risk that have been developed in the light of experimentally observed violations of expected utility theory are essentially deterministic in nature yet it is clear that actual decision making contains a random or error component this paper surveys the assumptions that have been employed in previous analyses of such experimental data and tries to find better explanations both from an economic and an econometrics point of view of such errors hopefully such work will lead to a unified theory in which the stochastic component is an integral part

uninsurable shocks and international income convergence the dynamics of production and income growth across countries or across regions within the same country are often thought to give evidence on whether returns to accumulation are increasing constant or decreasing at the local level when poor countries or regions are found to grow no faster than richer ones such lack of convergence is viewed as unfavorable evidence for models in which technology offers high returns to accumulation in relatively capital poor locations see e g paul romer 1987 when population growth saving or investment rates and other determinants of long run income levels in the neoclassical model are controlled for residual income differences across countries and across regions within the same country appear to vanish slowly but significantly over time this suggests that local returns to accumulation are decreasing if the reference theoretical model takes technology to be uniform across locations features unexplained and permanent differences in saving behavior and eliminates or limits capital mobility across locations these assumptions clearly oversimplify reality in various respects and a particular one is considered here 2 the theory that motivates empirical work on income convergence either takes saving propensities as exogenously given or else models them in terms of individual optimization under certainty random variability is essential to every empirical regression equation of course and real data are better represented by a stochastic steady state with ongoing uncertainty than by steady convergence toward steady state uniformity see e g danny quah 1993 to explore the possible role of exogenous and uninsurable income sources in the joint determination of savings behavior and income dynamics here i allow consumption and savings to draw on possibly stochastic location specific income sources which are independent of past accumulation at the local level and which remain relevant as the aggregate economy grows returns to accumulation are assumed to be constant both over time and cross sectionally thus ruling out decreasing returns to accumulation as the driving force of income convergence and ensuring that potential capital mobility need not induce actual capital flows under the common assumption of constant saving propensities this framework predicts that incomes should converge over time if the relative importance of nonaccumulated income is crosssectionally heterogeneous when individuals optimize their savings in light of the size and composition of their accumulated and nonaccumulated income sources consumption smoothing behavior leads to persistent but stationary dynamics for relative incomes and consumption levels the concluding section briefly discusses the extent to which these saving based insights may be applicable to international or interregional income dynamics

behavior in the centipede game a decision theoretical perspective the centipede game is a two player finite game of perfect information where a unique subgame perfect nash equilibrium appears to be intuitively unappealing and descriptively inadequate this paper analyzes behavior in the centipede game when a traditional game theoretical assumption that players maximize expected utility is relaxed we demonstrate the existence of a descriptively adequate subgame perfect equilibrium under two standard decision theoretical assumptions first players choose under uncertainty in a probabilistic manner as captured by embedding a core deterministic decision theory in a model of probabilistic choice second players adopt non linear decision weights and overweight the likelihood of rare events as captured for example by rank dependent utility or prospect theory

understanding preference imprecision the term preference imprecision seems to have different meanings to different people in the literature one can find references to a number of expressions for example vagueness incompleteness randomness unsureness indecisiveness and thick indifference curves some of these are theoretical constructs some are empirical the purpose of this paper is to survey the various different approaches and to try to link them together to see if they are all addressed to the same issue and to come to some conclusions in the course of this survey we report on evidence concerning the existence of preference imprecision and its impact on theoretical and empirical work

beyond revealed preference choice theoretic foundations for behavioral welfare economics we propose a broad generalization of standard choice theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models our approach exploits the coherent aspects of choice that those positive models typically attempt to capture it replaces the standard revealed preference relation with an unambiguous choice relation roughly x is strictly unambiguously chosen over y written xp y iff y is never chosen when x is available under weak assumptions p is acyclic and therefore suitable for welfare analysis it is also the most discerning welfare criterion that never overrules choice the resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories with novel implications though not universally discerning it lends itself to principled refinements

free markets and fettered consumers are consumers sufficiently self interested and self reliant so that privatized markets deliver the efficiency and welfare gains they promise why are consumers uncomfortable in markets and in some case sufficiently opposed to market solutions to prevent their implementation what can be done to prepare consumers so that they function satisfactorily in markets and understand the advantages of market based resource allocation this paper examines the foundations of consumer behavior and attitudes in markets and proposes a program of scientific research to determine how consumers cope in privatized markets and the implications for market design of the limits of self reliance

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

internationalization and changes in tax policy in oecd countries the importance of domestic veto players this article examines the role that economic and political factors played in tax reform in organization for economic cooperation and development oecd countries from 1986 to 1990 some writers argue that economic integration forced states to reform their tax systems the authors findings indicate that economic openness had an indirect effect on the level of change in marginal tax rates the institutional structure of a country was most important countries that had only one veto player or only one institution or party whose approval was necessary for a bill to become law enacted more sweeping reform than states that had more than one veto player these results suggest that even when international or domestic economic factors might dictate a change in policy reform will not be as sweeping in countries in which agreement among several institutions and or parties is necessary

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

do non expected utility choice patterns spring from hazy preferences an experimental study of choice errors individuals often have only incompletely known preferences when choosing between pair wise gambles particular presentations of the choice problem may then passively encourage the use of some choice method to clarify the preference different presentational displays can then lead to choice patterns predicted by one or other generalised expected utility theory when a preference is not or cannot be constructed choices will be arbitrary i run an experiment that uses three different presentational displays and incorporates a strength of preference indicator the experiment investigates regret theory as an example of a generalised expected utility theory as preference strength is found to vary by display regret effects event splitting effects and choice reversals are all found to be display dependent it is suggested that the evidence is best explained by assuming incomplete eu preferences which are clarified by constructive heuristics rather than some generalised expected utility model coupled with an error term

capital flows to developing countries long and short term determinants this article focuses on the determinants of the large portfolio flows from the united states to latin american and asian countries during 1988 92 cointegration techniques reveal that both domestic and global factors explain bond and equity flows to developing countries and represent significant long run determinants of portfolio flows the article also investigates the dynamics of portfolio flows by estimating seemingly unrelated error correction models global and country specific factors are equally important in determining the long run movements in equity flows for both asian and latin american countries while global factors are much more important than domestic factors in explaining the dynamics of bond flows u s interest rates are a particularly important determinant of the short run dynamics of portfolio especially bond flows to developing countries copyright 1997 by oxford university press

the current impasse in research on optimum currency areas abstract the only visible advance in the theory of the optimum currency area oca since mundell wrote in 1961 is the proposal of new criteria for determining the optimal size of a currency area the paper first tries to substantiate this general assessment and then argues that the fault lies in the profession s unwillingness to adopt a formal analysis of the subject divorced from the policy aspects we could make considerable progress in analysing the oca by merely following our usual procedure of defining a general welfare function to be compared if not maximised under different well specified conditions furthermore any move in this direction would take us far beyond the current enumeration of criteria for an oca

preference reversals the impact of truth revealing monetary incentives researchers vigorously debate the impact of incentives in preference reversal experiments do incentives alter behavior and generate economically consistent choices lichtenstein and slovic 1971 document inconsistencies reversals in revealed preference in gamble pairs across paired choice and individual pricing tasks the observed pattern is inconsistent with stable underlying preferences expressed with simple errors lichtenstein and slovic 1973 and grether and plott 1979 introduce incentives but aggregate reversal rates change little these results fostered numerous replications and assertions that models of non stable preferences are required to explain reversals contrary to this research we find that incentives can generate more economically consistent behavior our reevaluation of existing experimental data shows that incentives have a clear impact by better aligning aggregate choices and prices the effect is sufficiently large that with truth revealing incentives a stable preferences with error model not only explains behavior but fits the data as well as any model possibly could

similarity judgments and anomalies in intertemporal choice i introduction evidence accumulated over many years reveals the inadequacies of the expected utility hypothesis as a descriptive model of choice under uncertainty over a much shorter period of time evidence has accumulated revealing systematic violations of the standard model of choice over time the discounted utility model in rubinstein 1988 azipurua et al 1993 and leland 1994 1998 choice anomalies under uncertainty occur because agents base their decisions on judgments regarding the similarity or dissimilarity of prizes and probabilities across alternatives 1 this article specifies conditions under which such a procedure implies analogous violations of the discounted utility model in intertemporal settings ii choice anomalies under uncertainty and over time axioms assumed in models of choice place restrictions on what agents can choose across different pairs of alternatives the independence axiom for example requires that for risky or riskless options l sub 1 l sub 2 and l sub 3 if l sub 1 is weakly preferred to l sub 2 then the lottery l sub 1 p l sub 3 1 p must be weakly preferred to the lottery l sub 2 p l sub 3 1 p for any p one consequence of this requirement is that preferences between simple lotteries x sub 1 p sub 1 0 1 p sub 1 and x sub 2 p sub 2 0 1 p sub 2 must be invariant to changes in the values of p sub 1 and p sub 2 which leave their ratio undisturbed in choices between s and r and between s and r for example independence requires either the choice of s and s or the choice of r and r s 3000 0 90 0 0 10 r 6000 0 45 0 0 55 s 3000 0 02 0 0 98 r 6000 0 01 0 0 99 the stationarity assumption of the discounted utility model of intertemporal choice places restrictions on how agents can choose between pairs of intertemporal prospects consider simple intertemporal prospects t sub j and t sub k shown below where t sub j offers an increment to consumption x sub j in time period t sub j and t sub k offers an increment to consumption x sub k in time period t sub k t sub j x sub j t sub j t sub k x sub k t sub k assuming for simplicity a common baseline level of consumption per period c agents deciding between these options according to the discounted utility model will choose as follows where u is a concave ratio scaled utility function delta is the one period discount factor and and denote strict preference and indifference respectively 2 1 formula not reproducible in ascii dividing through by delta sub j and rearranging terms yields the following expression 2 formula not reproducible in ascii expression 2 reveals that the only way discounting enters into the decision is through the absolute difference in the time periods as such agents given choices between t sub 1 and t sub 2 and between t sub 11 and t sub 12 shown below must either select t sub 1 and t sub 11 or t sub 2 and t sub 12 since the absolute time interval in both choices is identically 1 period t sub 1 20 1 month t sub 2 25 2 months t sub 11 20 11 months t sub 12 25 12 months neither the restrictions implied by the independence axiom nor those following from stationarity hold empirically instead regarding the independence axiom kahneman and tversky 1979 among others find that individuals choosing the safer option s over r nevertheless choose the riskier option r over s as the difference between probabilities declines their ratio held constant this phenomenon is referred to as the common ratio effect they also find that for lotteries involving losses the opposite pattern rs obtains this phenomenon is referred to as the reflection effect

incorporating biometric data in models of consumer choice the use of neuro physiological data in models of consumer choice is gaining popularity this article presents some of the benefits of using psycho physiological data in analyzing consumer valuation

solving endogenous regime switching models abstract this paper solves rational expectations models in which structural parameters switch across multiple regimes according to state dependent endogenous transition probabilities assuming small shocks and smooth transition probabilities we apply a perturbation approach we first provide for conditions under which a unique bounded equilibrium exists we then compute first and second order approximations in a new keynesian model with monetary policy switching we document new effects of monetary policy switching when transition probabilities depend on inflation

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

testing expected utility in the presence of errors one possible conclusion from recent experimental research on decision making under risk is that observed behaviour can be reasonably accommodated by expected utility plus an error term this conclusion implies that the violation rate of expected utility should decrease if errors are excluded this article reports on an experiment which investigates this implication by presenting the same choice problems to subjects three times the results show that the exclusion of errors leads to a significant reduction of the violation rate for most of the cases this observation can be regarded as supporting evidence for expected utility plus error term the common consequence effect and the common ratio effect both introduced by allais 1953 are the most prominent and most investigated violations of expected utility eu they have motivated the development of alternative theories of choice under risk which are able to accommodate the observed behavioural patterns nowadays a large number of alternative theories exist see starmer 2000 sugden 2004 and schmidt 2004 for surveys and naturally the question arises which theory can explain observed behaviour best many studies have addressed this question most prominent seem to be those of harless and camerer 1994 and hey and orme 1994 since eu and its alternatives are deterministic theories but observed choices are stochastic both papers integrated an error term into their estimations this fact has aroused interest in a general discussion of the role of errors in decision making under risk the discussion can be disentangled into two issues the first issue concerns the modelling of the stochastic component harless and camerer 1994 hey and orme 1994 camerer and ho 1994 hey 1995 loomes and sugden 1995 and corresponding experimental tests carbone 1997 ballinger and wilcox 1997 loomes and sugden 1998 carbone and hey 2000 buschena and zilberman 2000 loomes et al 2002 the second issue concerns the performance of eu and its alternatives for given specifications of the error term in this context hey 1995 building upon the results of hey and orme 1994 arrives at the following conclusion

loss avoidance as selection principle evidence from simple stag hunt games abstract we investigate experimentally the conjecture that loss avoidance solves the tension in stag hunt games for which payoff dominance and risk dominance make conflicting predictions contrary to received textbook wisdom money losing outcomes do shift behavior albeit not strongly toward the payoff dominant equilibrium

stationary time varying risk premia in forward foreign exchange rates abstract there is mounting evidence that forward foreign exchange rates contain time varying risk premia however this evidence is from tests for which statistical inference is based on asymptotic distribution theory furthermore it is uncertain whether risk premia evolve as stationary or nonstationary processes this paper applies two exact small sample pointwise most powerful invariant statistical tests to determine 1 whether forward exchange rates contain time varying risk premia and 2 whether the time varying risk premia are stationary or nonstationary these tests finds strong evidence that forward exchange rates contain stationary time varying risk premia during the recent float evidence from the interwar float is mixed

information about bank risk in options prices abstract the volatility of its share price reflects the volatility of the market value of a bank s assets we present data for the volatilities of individual banks shares that are implied by the prices of options on the banks shares we present evidence that implied volatilities iv s better forecast actual future volatilities of share prices than historical volatilities do banks iv s are correlated with marketwide volatility with the levels of their own share prices with their own subordinated debt yield spreads and with other banks iv s bank capital reduces the response of iv s to market volatility iv s are likely to add information about bank risk that is timely cheap objective and useful