welfare economics risk and uncertainty social decisions in risky contexts raise a number of difficult questions such as 1 should social decisions be more or less risk averse than the average person 2 should we try to avoid large catastrophes more than frequent but limited harms with similar expected impact 3 should social decisions be ambiguity averse or stick to the expected utility canon this paper reviews the welfare economics of risk and uncertainty and examines possible answers to these questions based on the pros and cons of utilitarianism ex ante egalitarianism and ex post egalitarianism

global risk investment and emotions we investigate a novel dynamic choice problem in an experiment where emotions are measured through self reports the choice problem concerns the investment of an amount of money in a safe option and a risky option when there is a global risk of losing all earnings from both options including any return from the risky option our key finding is that global risk can reduce the amount invested in the risky option this result cannot be explained by expected utility or by its main contenders rank dependent utility and cumulative prospect theory an explanation is offered by taking account of emotions using the emotion data from the experiment and recent psychological findings

a rank dependent utility model of uncertain lifetime abstract in a continuous time life cycle model of consumption with an uncertain lifetime we use a non parametric specification of rank dependent utility theory to characterize the preferences of the agent we prove that time consistency holds for a subclass of probability weighting function providing the foundation for a constant rate of time preference that interacts multiplicatively with the hazard rate instead of additively as in the yaari 1965 seminal model we calibrate both models to explain the hump in the life cycle consumption and show that the multiplicative model is more robust

evaluating decision strategies for equity of public risks many important decisions include the loss of life among their possible consequences alternative actions have different implications for the number of possible fatalities the equity of those eventual fatalities and the equity of the process resulting in those fatalities this paper defines a concept of ex ante risk equity to address the equity of the process and distinguishes this concept from the ex post risk equity of the fatalities the paper indicates that an analysis of decision strategies addresses ex ante equity in this context both types of equity as well as loss of life are included in a von neumann morgenstern utility model developed to evaluate public risks this approach provides a method to investigate the implications of different value judgments in examining alternatives and illustrates an appropriate use of von neumann morgenstern utility for problems involving social consequences such as public risks

the strategic implications of sunk costs a behavioral perspective abstract this paper examines some of the strategic implications of the sunk cost phenomenon in sequential allocation decisions drawing from psychology and behavioral decision theory we first present a taxonomy of possible causes for the sunk cost effect the tendency of many managers to throw good money after bad we then present the analysis of some implications of this behavior in strategic situations a two period strategic game is developed and analyzed to derive optimal allocations as a function of one player s sunk cost behavior we establish when this behavior can be used as a successful precommitment strategy by the sunk cost player and when it is exploitable by an opponent welfare implications are also explored the sunk cost effect constitutes a form of strategic preference manipulation in which a credible preference change can be induced to provide a strategic advantage to one of the players

the ellsberg paradox and risk aversion an anticipated utility approach the paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities the ellsberg paradox this is done by modeling ambiguous lotteries as two stage lotteries by assuming the independence axiom without the reduction of compound lotteries axiom and by using the anticipated utility functional this paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter personal comparisons finally it proves that within the anticipated utility framework risk and ambiguity are almost identical copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimism pessimism and financial bubbles this paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank dependent expected utility this rdu assumption can be viewed as a transformation of probabilities depending on the pessimism optimism of the agent the results show that pessimism favors the existence of deterministic bubbles when optimism may promote the existence of stochastic bubbles moreover under pessimism the rdu assumption may generate multiple bubbly equilibria the rdu assumption also leads to new conditions ensuring the absence of pareto optimality of the competitive equilibrium without bubbles these conditions still govern the existence of bubbles

social preferences under risk equality of opportunity versus equality of outcome this paper axiomatizes a utility function for social preferences under risk in the model a single parameter captures a preference for equality of opportunity i e equality of exante expected payoffs relative to equality of outcome i e equality of ex post payoffs in a deterministic environment the model reduces to the model of fehr and schmidt 1999 the model is consistent with recent experiments on probabilistic dictator games

generalized expected utility analysis of risk aversion with state dependent preferences in this paper the author develops measures of absolute risk aversion for preference relations on risky prospects that are state dependent and are representable by frechet differentiable nonlinear functionals a comparative statics analysis of optimal air travel insurance coverage illustrates the usefulness of the proposed measures it is also demonstrated that the analytical framework described above is consistent with the purchase of air travel insurance even in circumstances where expected utility theory is not copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

corrigendum to bargaining and boldness abstract we show the incompatibility between the existence of stationary subgame perfect equilibria in shaked s game of cycling offers with exogenous breakdown and the behavior of players consistent with the allais paradox thus the strategic support of the equally marginally bold solution presented in burgos grant and kajii 2002 games econ behav 38 28 51 does not go beyond the two person case

rationality of weather predictions and insurance purchases testing the gambler s and hot hand fallacies deviations from the rational behaviour assumed in many economic models have been found in a variety of settings two such deviations the gambler s and hot hand fallacies have been found in lab set

rational choice a survey of contributions from economics and philosophy this paper looks at the philosophical foundations of rational choice theory it is argued that l savage s expected utility axioms cannot be defended as requirements of instrumental rationality in part because of their implications for the description of consequences then it is argued that common knowledge of rationality does not imply that rational game players must be in nash equilibrium and for some games is an incoherent concept finally the suggestion that rational choice theory is self defeating is examined in relation to coordination games where the theory cannot explain the role of salience and the concept of resolute choice copyright 1991 by royal economic society

vickrey auctions in the theory of expected utility with rank dependent probabilities abstract when decision makers maximize expected utility with rank dependent probabilities and the object being auctioned is a risky prospect then with independent private value vickrey auctions lose their demand revealing property moreover they might be non pareto optimal

analysis of uncertainty as opposed to risk an experimental approach the paper illustrates the scope for enhancing the conceptual apparatus used by agricultural economists to analyse decision making under conditions of uncertainty selected empirical results from experiments on student subjects from three universities are reported three issues are considered first the reasons for choice and the understanding of a choice problem are examined second attitudes towards different levels of uncertainty are measured third the possibility that apparently non normative psychological factors influence choice is explored the paper serves to illustrate and support a number of methodological points the major points are that a risk uncertainty distinction is useful contrary to the aging conventional wisdom of economic theory that laboratory experiments can potentially provide data of use to agricultural economists and that predictive models of choice under uncertainty may be more accurate if they take account of psychological variables which influence the decision making processes of human subjects

failure of blackwell s theorem under machina s generalization of expected utility analysis without the independence axiom abstract considerable evidence suggests that the independence axiom of expected utility theory is not empirically supported in response machina has generalized expected utility theory in such a way that the independence axiom is not required most of the basic concepts and results of expected utility theory still hold under machina s generalization however blackwell s theorem a fundamental result in information economics fails to hold under machina s generalization of expected utility theory without the independence axiom

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

bargaining and boldness abstract we study a multiperson bargaining problem with general risk preferences through the use of shaked s game of cycling offers with exogenous breakdown if preferences are smooth then as the risk of breakdown vanishes the limiting outcome is one in which bargainers are equally marginally bold where a bargainer s marginal boldness measures his willingness to risk disagreement in return for a marginal improvement in his position under smoothness any ordinal nash solution is an equally marginally bold outcome however unlike the concept of the ordinal nash solution a unique equally marginally bold outcome exists in natural cases in particular if all bargainers have risk averse preferences of the rank dependent expected utility type for these preferences the equally marginally bold outcome maximizes a bargaining power adjusted asymmetric nash product where the degree of asymmetry is determined by the disparity in the marginal valuation of certainty among bargainers journal of economic literature classification numbers c72 c78 d81

nonparametric test of the expected utility hypothesis a nonparametric test of the expected utility hypothesis is developed in this paper the expected utility hypothesis is shown to hold if there exists a feasible solution to a particular system of linear inequalities furthermore when a feasible solution exists boundaries on the coefficient of absolute risk aversion can be calculated explicitly the test is applied to data on land allocations modeled as choices over lottery sets results contrary to those obtained in many laboratory experiments show that in most cases the expected utility hypothesis cannot be rejected

can expected utility theory explain gambling we investigate the ability of expected utility theory to account for simultaneous gambling and insurance contrary to a previous claim that borrowing and lending in perfect capital markets rules out a demand for gambles we show that expected utility theory with non concave utility functions can still explain gambling when the rates of interest and time preference are equal agents will seek to gamble unless income falls in a finite set of exceptional values when these rates differ there will be a range of incomes for which gambles are desired in both cases repeated gambling is not explained but market imperfections such as different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference

temptation driven preferences my own behaviour baffles me for i find myself not doing what i really want to do but doing what i really loathe saint paulwhat behaviour can be explained using the hypothesis that the agent faces temptation but is otherwise a standard rational agent in earlier work gul and pesendorfer 2001 use a set betweenness axiom to restrict the set of preferences considered by dekel lipman and rustichini 2001 to those explainable via temptation we argue that set betweenness rules out plausible and interesting forms of temptation including some which may be important in applications we propose a pair of alternative axioms called dfc desire for commitment and aic approximate improvements are chosen dfc characterizes temptation as situations in which given any set of alternatives the agent prefers committing herself to some particular item from the set rather than leaving herself the flexibility of choosing later aic is based on the idea that if adding an option to a menu improves the menu it is because that option is chosen under some circumstances from this interpretation the axiom concludes that if an improvement is worse as a commitment than some commitment from the menu then the best commitment from the improved menu is strictly preferred to facing that menu we show that these axioms characterize a natural generalization of the gul pesendorfer representation copyright wiley blackwell

extensive form games with uncertainty averse players abstract nash equilibrium presumes that the beliefs of a player are represented by a probability measure motivated by the ellsberg paradox and relevant experimental findings demonstrating that this representation of beliefs may be unrealistic this paper generalizes nash equilibrium in finite extensive form games to allow for preferences conforming to the multiple priors model developed by gilboa and schmeidler journal of mathematical economics 18 1989 141 153 the implications of this generalization for strategy choices and welfare are studied journal of economic literature classification numbers c72 d81

existence and uniqueness of ordinal nash outcomes abstract in this paper we present necessary and sufficient conditions for existence and uniqueness of ordinal nash outcomes these outcomes are derived from the ordinal nash solution a reinterpretation and an extension of the nash bargaining solution that allows bargainers to have preference relations that are more general than expected utility our task is undertaken by the construction of a new notion called induced utilities journal of economic literature classification number c78

utilities versus rights to publicly provided goods arguments and evidence from health care rationing grounds of the consequentialist and sometimes approximately utilitarian moral framework on which it is based an alternative methodological approach is suggested and in addition to consequences four normative determinants of health care entitlements are identified rights public opinion social contracts and community values survey evidence is presented which shows support for these alternative frameworks and a rejection of consequentialism the paper suggests that a if not the major challenge facing the designers of rationing guidelines is that of pluralism i e the need to integrate considerations from a set of frameworks

decision making over time and under uncertainty a common approach this paper considers a number of parallels between risky and intertemporal choice we begin by demonstrating a one to one correspondence between the behavioral violations of the respective normative theories for the two domains i e expected utility and discounted utility models we argue that such violations or preference reversals are broadly consistent with three propositions about the weight that an attribute receives in both types of multiattribute choice specifically it appears that 1 if we add a constant to all values of an attribute then that attribute becomes less important 2 if we proportionately increase all values of an attribute or if we change the sign of an attribute from positive to negative then that attribute becomes more important the generality of these propositions as well as the constraints they would impose on separable representations of multiattribute preferences is discussed

dynamic choice and the common ratio effect an experimental investigation the common ratio effect is a well attested violation of expected utility theory this paper uses four principles of dynamic choice to characterise alternative theoretical strategies for explaining the effect it reports an experiment which tests these principles and by implication several well known accounts of the common ratio effect unlike previous work the experimental design uses real financial incentives without presupposing any dynamic choice principles we find violation of a principle of timing independence which is part of most existing theories of dynamic choice we examine the implications of this finding for decision theory and economics

many good choice axioms when can many good lotteries be treated as money lotteries abstract without the independence axiom a weaker substitution axiom adi is necessary for the preferences over money lotteries induced by the money metric utility function to be well behaved given adi the agent s preferences over many good lotteries can be reconstructed from knowledge of preferences over money lotteries and over sure multivariate outcomes moreover other substitution properties of underlying many good lottery preferences are inherited by the money lottery preferences we analyze the formal and intuitive nature of adi and conclude that analysis of choice under uncertainty without adi cannot be one dimensional

existence and dynamic consistency of nash equilibrium with non expected utility preferences sufficient conditions for the existence of a nash equilibrium are given when preferences may violate the reduction of compound lotteries assumption rcla without rcla decision makers may not be indifferent between compound lotteries which have the same probabilities of final outcomes therefore the conditions depend on how players perceive the game whether they view themselves as moving first or second we also review conditions under which the equilibria will be dynamically consistent

changing tastes and effective consistency in a single commodity setting with changing tastes an individual s consumption plan can be obtained using naive or sophisticated choice we provide two sufficient conditions for when the solutions are unique and agree and the common plan is representable by a non changing tastes utility because the solution is not revised over time the plan and associated preferences are referred to as being effectively consistent afriat style revealed preference tests are derived the assumption of effective consistency can mitigate the problems of vulnerability to dutch books non existence of a competitive equilibrium and the aggregation of heterogeneous agents with changing tastes abstract from author

welfare maximization entices participation abstract we consider randomized public good mechanisms with optional participation preferences over lotteries are modeled using skew symmetric bilinear ssb utility functions a generalization of classic von neumann morgenstern utility functions we show that every welfare maximizing mechanism entices participation and that the converse holds under additional assumptions as a corollary we obtain a characterization of an attractive randomized voting rule that satisfies condorcet consistency and entices participation this stands in contrast to moulin s well known no show paradox j of econ theory 45 53 64 1988 which shows that no deterministic voting rule can satisfy both properties simultaneously

making book against oneself the independence axiom and nonlinear utility theory an individual with known preferences over lotteries can be led to accept random wealth distributions different from his initial endowment by a sequential process in which some uncertainty is resolved and he is offered a new lottery in place of the remaining uncertainty this paper examines the restrictions that can be placed on an individual s preferences by axioms that stipulate that such a process not be able to generate a new wealth distribution that is prima facie inferior to the original the relationship of these axioms to the independence axiom of von neumann and morgenstern and to the quasi convexity of preferences in the wealth distribution are explored

cumulative prospect theory option returns and the variance premium the variance premium and the pricing of out of the money otm equity index options are major challenges to standard asset pricing models we develop a tractable equilibrium model with cumulative prospect theory cpt preferences that can overcome both challenges the key insight is that the variance premium can be written as the expected return on a portfolio of otm call and put options and the probability weighting feature of cpt can explain the puzzlingly low returns observed for these options using gmm on a sample of u s index option returns between 1996 and 2010 we show that the cpt model ts well observed option prices and therefore the variance premium in a dynamic setting probability weighting and time varying equity return volatility combine to match the observed time series pattern of the variance premium

on the interpretation of the nash bargaining solution and its extension to non expected utility preferences the paper reexamines the foundations of the axiomatic nash bargaining theory more specifically it questions the interpretation of the nash bargaining solution and extends it to a family of non expected utility preferences a bargaining problem is presented as x d 2 where x is a set of feasible agreements described in physical terms d is the disagreement event and 1 and 2 are preferences defined on the space of lotteries in which the prizes are the elements in x and d the ordinal nash bargaining solution is defined as an agreement y satisfying for all p e 0 1 and for all x e x if px 1 y then py 2 x and if px 2 y then py x where px is the lottery which gives x with probability p and d with probability 1 p revisions of the pareto symmetry and iia axioms characterize the ordinal nash bargaining solution in the expected utility case this definition is equivalent to that of the nash bargaining solution however this definition is to be preferred since it allows a statement of the nash bargaining solution in everyday language and makes possible its natural extension to a wider set of preferences it also reveals the logic behind some of the more interesting results of the nash bargaining solution such as the comparative statics of risk aversion and the connection between the nash bargaining solution and strategic models

non cooperative bargaining theory an introduction the paper provides an informal introduction to some of the main themes of the recent literature on non cooperative or sequential bargaining models it focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by nash bargaining theory it illustrates the new insights offered by the non cooperative approach by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome finally the difficulties which arise in extending this analysis to two person bargaining with incomplete information and to n person bargaining are discussed this is a revised version of the fourth review of economic studies lecture presented in april 1985 at the joint meeting of the association of university teachers of economics and the royal economic society held in oxford the choice of lecturer is made by a panel whose members are currently professors hahn mirrlees and nobay and the paper is refereed in the usual way this paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years the approach involves writing down some particular sequence of moves offers and replies to be made over time in the course of negotiations and then looking for a non cooperative equilibrium in the game thus specified in practice a perfect equilibrium or in games of incomplete information a sequential equilibrium while the approach appears at first sight to be very different in spirit from the traditional axiomatic approach in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations the two approaches are in fact complementary while the

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

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

a cardinal characterization of the rubinstein safra thomson axiomatic bargaining theory in a recent paper rubinstein safra and thomson rst have provided an interesting re examination of the widely applied nash solution for a two person bargaining problem they recast the usual nash bargaining problem into a more natural setting of feasible alternatives with a disagreement outcome the two players are then described by their risk preferences defined on the set of lotteries over the alternatives and the disagreement outcome this enables them to define an ordinal nash solution in terms of the agents risk preferences essentially their ordinal solution is an outcome that is immune against possible objections freeing the definition of the nash solution from utility naturally led rst to extending its scope to non expected utility neu preferences we contend however that the family of neu preferences considered by rst is unduly restrictive the assumptions imposed on the risk preferences by rst essentially exclude any members of the rank dependent expected utility rdeu and betweenness families that can accommodate the very choice paradoxes that stimulated the development of neu theory as these are two of the most extensively analyzed and widely applied neu models in the literature this seems to cast doubt on how broad an extension to neu preferences the rst approach affords we demonstrate however that rst s analysis can be modified so that their conclusion is valid in a wider class of preferences that can include examples of rdeu preferences this class consists of preferences that admit what we term a disagreement linear representation

equilibrium without independence abstract because players whose preferences violate the von neumann morgenstern independence axiom may be unwilling to randomize as mixed strategy nash equilibrium would require a nash equilibrium may not exist without independence this paper generalizes nash s definition of equilibrium retaining its rational expectations spirit but relaxing its requirement that a player must bear as much uncertainty about his own strategy choice as other players do the resulting notion equilibrium in beliefs is equivalent to nash equilibrium when independence is satisfied but exists without independence this makes it possible to study the robustness of equilibrium comparative statics results to violations of independence

prospect theory in a dynamic game theory and evidence from online pay per bid auctions abundant evidence exists that expected utility theory does not adequately describe decision making under risk although prospect theory is a popular alternative it is rarely applied in strategic situations in which risk arises through individual interactions this study fills this research gap by incorporating prospect theory preferences into a dynamic game theoretic model using a large field data set from multiple online pay per bid auction sites the authors empirically show that their proposed model with prospect theory preferences makes a better out of sample prediction than a corresponding expected utility model prospect theory also provides a unified explanation for two behavioral anomalies average auctioneer revenues above current retail prices and the sunk cost fallacy the empirical results indicate that bidders are loss averse and overweight small probabilities such that the expected revenue of the auction exceeds the current retail price by 25 46 the authors illustrate and empirically confirm a managerial implication for how an auctioneer can increase revenue by changing the details of the auction design

the nash bargaining solution for decision weight utility functions abstract a simple derivation of the non expected utility nash outcome as defined in rubinstein et al 1992 rubinstein a safra z thomson w 1992 on the interpretation of the nash bargaining solution and its extension to non expected utility preferences econometrica 60 1171 1186 is given for the class of decision weight utility functions conditions for existence and uniqueness are provided

the pareto principle of optimal inequality the pareto principle is often viewed as a mild requirement compatible with a variety of value judgements in particular it is generally thought that it can accommodate different views on the desirable degree of equality we show that this is generally not true in intertemporal models where some uncertainty prevails to do so we formalize the concept of inequality aversion we show that different degrees of inequality aversion are not possible in typical models of time consistent dynamic decision under uncertainty

food scares in an uncertain world we develop a model that explains the stylized facts of food scares an immediate and sharp decline in consumption of the product followed by a slow and frequently partial recovery of demand after the scare passes the model is used in conjunction with the natural experiment afforded by the mad cow crisis to elicit empirical information on decision makers perception of uncertainty our theoretical and quantitative results suggest that observed behavior is consistent with sharp changes in beliefs and the presence of knightian uncertainty as measured by the degree of imprecision in our model

the effect of decision weights in bargaining problems abstract bargaining problems are considered where the preferences of the bargainers deviate from expected utility but can be modelled according to rank dependent utility theory under rank dependent utility both the utility function and the probability weighting function influence the risk attitude of a decision maker the same definition of risk aversion leads to two forms of risk aversion utility risk aversion and probabilistic risk aversion the main finding is that these two forms can have surprisingly opposite consequences for bargaining solutions that exhibit a weak monotonicity property in particular in a large class of bargaining problems both increased utility risk aversion and decreased probabilistic risk aversion of the opponent are advantagous for a player this is demonstrated for the kalai smorodinsky bargaining solution the nash bargaining solution does not behave regularly in this respect

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

investment under uncertainty testing the options model with professional traders abstract an important class of investment decisions is characterized by unrecoverable sunk costs resolution of uncertainty through time and the ability to invest in the future as an alternative to investing today the options model provides guidance in such settings including an investment decision rule called the bad news principle the downside investment state influences the investment decision whereas the upside investment state is ignored this study takes a new approach to examining predictions of the options model by using the tools of experimental economics our evidence drawn from student and professional trader subject pools is broadly consonant with the options model

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

the socioeconomic consequences of in work benefit reform for british lone mothers in october 1999 the british government enacted the working families tax credit which aimed at encouraging work among low income families with children this paper uses panel data collected between 1991 and 2001 to evaluate the effect of this reform on single mothers we find that the reform led to a substantial increase in their employment rate of about five percentage points which was driven by both a higher rate at which lone mothers remained in the labor force and a higher rate at which they entered it women s responses were highly heterogeneous with effects double this size for mothers with one preschool aged child and virtually no effect for mothers with multiple older children the employment increase was accompanied by significant increases in paid childcare utilization and our analysis in fact suggests that the generous childcare credit component of the reform played a key role in explaining the estimated employment and childcare usage responses we also find that the increase in labor market participation was accompanied by reductions in single mothers subsequent fertility and in the rate at which they married behavioral responses which in turn are likely to influence the reform s overall impact on child poverty and welfare

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

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

public provision of private goods government may provide a good that can if legally permitted be supplemented by private purchases policy is determined by majority rule under standard assumptions on preferences a majority voting equilibrium exists a regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision combined public and private expenditure on the good is higher under this dual provision regime than under either of the alternatives under some preference configurations the median income voter is pivotal under others a voter with income below the median is pivotal

child care voucher and labour market behaviour experimental evidence from finland this article provides experimental estimates of the impact of a voucher for private care on labour force participation and use of private and public child care within the nordic system of universal provision of public care in a market that was providing high quality low cost public child care a voucher is nevertheless found to have a significant positive effect for the use of private child care with zero effects on either use of public care or labour force participation the use of private increased by five percentage points in the whole country and by five to seven percentage points in areas that suffer from excess demand for child care as a result of the introduction of the private child care voucher

bargaining solutions without the expected utility hypothesis abstract we first generalize the nash bargaining solution to the case where decision makers are not necessarily expected utility eu maximizers we suggest two different approaches and show that the two extensions coincide when the preferences are of the eu and the rank dependent utility rdu types the extensions differ in the case of weighted utility wu preferences we also investigate the sensitivity of the extensions to changes in the degree of risk aversion when the first extension is considered the existing results depend on the eu assumption for more general preferences the solutions depend on the concavity of the certainty utilities when the second extension is considered the well known eu results remain unchanged journal of economic literature classification numbers 022 026

dynamically consistent voting rules abstract this paper studies preference aggregation in a dynamic choice context voters face menus of options in stages and the source of dynamics is that menus possibly get smaller across each stage we call the family of stage voting rules dynamic voting rules and provide an axiomatic characterization on the domain of single peaked preferences of dynamic voting rules that are strategy proof and satisfy a second property inspired from choice theory which we call dynamic consistency

appeals immune bargaining solution with variable alternative sets a bargaining solution based on the rubinstein safra thomson ordinal nash outcome is investigated in the peters wakker revealed group preferences framework assuming non expected utility preferences necessary and sufficient conditions are stated on preference pairs in order for the solution to be well defined and axiomatized uniquely

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

sodbusting crop insurance and sunk conversion costs we build a real option model that articulates sodbusting incentives arising from risk interventions in the presence of conversion costs the model shows that risk interventions reduce expected costs of switching land use between cropping and noncropping activities and hence incentivize sodbusting based on data for south central north dakota over 1989 2012 our simulations show that offsetting 20 of a cropping return shortfall by a risk intervention increases the sodbusting cost threshold below which sodbusting will occur by 41 or 43 7 acre omitting cropping return risk across time underestimates the sodbusting cost threshold by 23 or 24 35 acre and hence underestimates sodbusting caused by crop production

testing risklove in an experimental racetrack abstract this paper tests the asch quandt betting hypothesis which accounts for the ubiquitous underbetting overbetting favourite longshot phenomenon found at most racetracks by postulating that horserace wagering is a consumption activity an experimental racetrack was designed with only off track betting permissible thereby eliminating much or all of the consumption involved but the basic anomaly remained and in a somewhat stronger form it is hypothesized that the observed betting behaviour of our subjects is consistent with prospect theory and its two outcome equivalent rank dependent expected utility theory

a model of casino gambling we show that prospect theory offers a rich theory of casino gambling one that captures several features of actual gambling behavior first we demonstrate that for a wide range of preference parameter values a prospect theory agent would be willing to gamble in a casino even if the casino offers only bets with no skewness and with zero or negative expected value second we show that the probability weighting embedded in prospect theory leads to a plausible time inconsistency at the moment he enters a casino the agent plans to follow one particular gambling strategy but after he starts playing he wants to switch to a different strategy the model therefore predicts heterogeneity in gambling behavior how a gambler behaves depends on whether he is aware of the time inconsistency and if he is aware of it on whether he can commit in advance to his initial plan of action this paper was accepted by brad barber teck ho and terrance odean special issue editors

the integration of claims to health care a programming approach the paper contributes to the use of social choice and welfare theory in health economics by developing and applying the integration of claims framework to health care rationing related to sen s critique of neo classical welfare economics the integration of claims framework recognises three primitive sources of claim consequences deontology and procedures a taxonomy is presented with the aid of which it is shown that social welfare functions reflecting these claims individually or together can be specified some of the resulting social choice rules can be regarded as generalisations of health maximisation and all have normative justifications though the justifications may not be universally acceptable the paper shows how non linear programming can be used to operationalise such choice rules and illustrates their differential impacts on the optimal provision of health care following discussion of relations to the capabilities framework and the context in which rationing occurs the paper concludes that the integration of claims provides a viable framework for modelling health care rationing that is technically rigorous general and tractable as well as being consistent with relevant moral considerations and citizen preferences

intrinsic preference for information abstract suppose agents value information not only to make contingent plans but also intrinsically how are such attitudes toward information related to attitudes toward risk we generalize the kreps porteus recursive expected utility model dropping both recursivity and expected utility there is a geometric analogy between risk and information we characterize intrinsic information loving in general by a substitution property analogous to multivariate risk loving and for smooth preferences by the convexity of gateaux derivatives even with recursivity preference for information does not imply expected utility we provide an example we examine connections between information loving and risk aversion for early and late resolving risks journal of economic literatureclassification numbers d80 d81

risk preferences are not time preferences risk and time are intertwined the present is known while the future is inherently risky this is problematic when studying time prefer ences since uncontrolled risk can generate apparently present biased behavior we systematically manipulate risk in an intertemporal choice experiment discounted expected utility performs well with risk but when certainty is added common ratio predictions fail sharply the data cannot be explained by prospect theory hyperbolic discounting or preferences for resolution of uncertainty but seem consistent with a direct preference for certainty the data suggest strongly a difference between risk and time preferences jel c91 d81 d91 understanding individual decision making under risk and over time are two foundations of economic analysis 1 in both areas there has been research to suggest that standard models of expected utility eu and exponential discounting are flawed or incomplete regarding time experimental research has uncovered evidence of a present bias or hyperbolic discounting frederick loewenstein and o donoghue 2002 regarding risk there are number of well documented departures from eu such as the allais 1953 common consequence and common ratio paradoxes an organizing principle behind expected utility violations is that they seem to arise as so called boundary effects where certainty and uncertainty are combined camerer 1992 harless and camerer 1994 and starmer 2000 indicate that violations of expected utility are notably less prevalent when all choices are uncertain this observation is especially interesting when considering decisions about risk taking over time in particular certainty and uncertainty are combined in intertemporal decisions the present is known and certain while the future is inherently risky this observation is problematic if one intends to study time preference in isolation from

on the interpretation of nonsymmetric bargaining solutions and their extension to nonexpected utility preferences abstract in a recent paper rubinstein safra and thomson reexamine the foundations of the axiomatic bargaining theory as formulated by nash in it they reinterpret the nash bargaining solution and extend it to a family of nonexpected utility preferences providing an interpretation of this solution concept and an axiomatization by means of a suitable translation of nash axioms this paper extends the work of these authors to the family characterized by kalai of nonsymmetric solutions that appear from the nash bargaining solution when the symmetry axiom is dropped this extension requires an axiom relating the solution outcomes of isomorphic games journal of economic literature classification number c78

contingent portfolio programming for the management of risky projects methods for selecting a research and development r d project portfolio have attracted considerable interest among practitioners and academics this notwithstanding the industrial uptake of these methods has remained limited partly because of the difficulties of capturing relevant concerns in r d portfolio management motivated by these difficulties we develop contingent portfolio programming cpp which extends earlier approaches in that it i uses states of nature to capture exogenous uncertainties ii models resources through dynamic state variables and iii provides guidance for the selection of an optimal project portfolio that is compatible with the decision maker s risk attitude although cpp is presented here in the context of r d project portfolios it is applicable to a variety of investment problems where the dynamics and interactions of investment opportunities must be accounted for

costly predation and the distribution of competence an evolutionary game model shows how an equilibrium distribution of competence may evolve when members of a population prey on one another but when predatory competence is costly to acquire under one interpretation the competence distribution is an endogenously determined distribution of bounded rationality an example shows how tricksters and suckers might coexist in the long run the analysis leads to a curious result about a mixed equilibrium for a symmetric zero sum game an increase in the costs of one or more competence levels has exactly zero effect on the fraction of the population at those levels