unshrouding evidence from bank overdrafts in turkey lower prices produce higher demand or do they a bank s direct marketing to holders of free checking accounts shows that a large discount on 60 apr overdrafts reduces overdraft usage especially when bundled with a discount on debit card or auto debit transactions in contrast messages mentioning overdraft availability without mentioning price increase usage neither change persists long after the messages stop these results do not square easily with classical models of consumer choice and firm competition instead they support behavioral models where consumers underestimate and are inattentive to overdraft costs and firms respond by shrouding overdraft prices in equilibrium this article is protected by copyright all rights reserved

sequential search with a budget constraint abstract for a buyer who searches sequentially for the lowest price from a known distribution but subject to a budget constraint the optimal policy will no longer have the reservation price property

comparing behavioral models using data from experimental centipede games the centipede game posits one of the most well known paradoxes of backward induction in the literature of experimental game theory given that deviations from the unique subgame perfect nash equilibrium generates a pareto improvement several theoretical models have been employed in order to rationalize this kind of behavior in this social dilemma the available explanations range from social preferences including fairness altruism or cooperation motives errors in playing inability to perform backward induction or different depths of reasoning in the present study we use the blavatskyy s theoretical contribution and relax the assumptions of expected utility maximization and risk neutral attitudes to test an alternative explanation we compare various probabilistic decision theory models in terms of their descriptive in sample and predictive out of sample fit performance using data from experimental centipede games we find that introducing non expected utility preferences to the quantal response equilibrium model along with a nonlinear utility function provides a better explanation compared to alternative specifications such as the level k or the quantal response equilibrium model with altruistic motives jel c72 c92 d81 d82

the realization effect risk taking after realized versus paper losses abstract understanding how prior outcomes affect risk attitudes is critical for the study of choice under uncertainty a large literature documents the significant influence of prior losses on risk attitudes the findings appear contradictory some studies find greater risk taking after a loss whereas others show the opposite that people take on less risk i reconcile these seemingly inconsistent findings by distinguishing between realized versus paper losses using new and existing data i replicate prior findings and demonstrate that following a realized loss individuals avoid risk if the same loss is not realized a paper loss individuals take on greater risk jel d11 d14 d81 g11

distributional weights in cost benefit analysis should we forget about them many argue that it is socially inefficient to use distributional weights in cost benefit analysis and that doing so implies large inefficiency losses when distributional matters can be dealt with trough income taxation instead our results question this view by showing a large range of cases when distributional weights are second best optimal to use one example is when different provided goods affect tax revenues equally per dollar spent utility functions that are separable in the provided goods is sufficient for this most results hold for linear and non linear income taxes and whether they are optimal or not general policy implications are discussed

losing money on the margin abstract margin trading is popular with retail investors around the world to limit the scale of these investors potential losses regulators impose a system of collateral requirements and margin calls we show in this paper however that the collateral requirement imposed by margin calls results in negative expected returns for these traders whilst also inducing positive skew in the returns distribution investments in assets with symmetric returns when traded on margin instead offer limited losses and a small chance of a large gain much like lottery stocks and other gambles we demonstrate this theoretically and then show empirically using a unique database of account data from a chinese retail brokerage that the realized losses of margin traders are often substantial this leads us to question whether current regulation is appropriate

equilibrium asset pricing with epstein zin and loss averse investors abstract we study multi period equilibrium asset pricing in an economy with epstein zin ez agents whose preferences for consumption are represented by recursive utility and with loss averse la agents who derive additional utility of gains and losses and are averse to losses we propose an equilibrium gain loss ratio for stocks and show that the la agents are more less risk averse than the ez agents if their degree of loss aversion is higher lower than this ratio when all the agents have unitary relative risk aversion degree and elasticity of intertemporal substitution we prove the existence and uniqueness of the equilibrium and the market dominance of the ez agents in the long run finally we extend our results to the case in which the la agents use probability weighting in their evaluation of gains and losses

search and consumer theory a consumer faces list prices for commodities but can buy one at a discount discounts vary randomly between sellers the number of quotations sought depends on list prices search costs and wealth this function is homogeneous of degree zero and provided some sufficient conditions are satisfied is increasing in wealth decreasing in search cost independent of the list price of the discounted commodity if indirect utility is multiplicatively separable increasing in the list price if the commodity is a necessity increasing in the list price of substitutes slutsky s equation is generalized to include search

project evaluation with democratic decision making what does cost benefit analysis really measure abstract it is often argued that projects involving public good changes should be chosen on the basis of monetary valuation and cost benefit analysis cba however cba is not value free when used to measure welfare it is based on highly controversial value judgements when used to measure efficiency it is based on assumptions of limited relevance to democratic decision making processes cba measures total net willingness to pay neither more nor less while interesting in its own right the normative significance of this indicator is not obvious

skewness preference and the popularity of technical analysis abstract we propose a simple model of how investors evaluate a trading rule and show that the market timing of technical trading rules induces lottery like trading profits therefore investors preference for positive skewness caters to the popularity of technical analysis since prospect theory implies strong skewness preference it can explain why investors trade extensively on chart patterns that are meaningless in light of the efficient market hypothesis technicians often invoke behavioral finance as its theoretical foundation contrary to this view we show that ideas from behavioral finance explain why technical analysis is popular despite the lack of theoretical foundation and empirical success

planned versus actual betting in sequential gambles abstract anecdotal evidence indicates that in a gambling environment consumers may end up betting more than they had initially planned the authors assess this phenomenon in a series of three experiments in which people are exposed to sequential and fair gambles in a two stage process planned and actual bets the results show that in the planning phase people behave conservatively betting on average less after an anticipated loss and the same amount after an anticipated gain however after experiencing an actual loss in the first gamble people bet in a subsequent gamble significantly more than they had initially planned whereas on average there were no observable differences from the plan after an actual gain the reason for such asymmetry is due in part to people s tendency to underestimate at the planning phase of the gamble the impact of negative emotions in betting decisions during the actual phase of the gamble

optimal adaptive price search consider the problem of a consumer desiring to buy a good which is sold at a variety of prices such a buyer will be able to obtain a sequence of price quotations from various sellers when should the buyer stop searching for a lower price if he continues he may obtain a lower price but he incurs additional time effort and expense in searching the optimal price search decision is one of balancing the expectation of a possibly lower price obtained by continued search against cumulative costs from search when the prices arise from a known probability distribution the optimal search strategy has certain well defined and desirable properties in the more realistic case that the buyer has only partial information about the price distribution and must update his beliefs after observing prices in the marketplace the problem becomes more complex and search strategies become less well behaved the major purpose of this article is to determine new conditions under which optimal policies have these desirable characteristics in the case where the consumer possesses only incomplete information about the distribution of prices price quotations he receives in addition to providing him with price possibilities provide him with information about that distribution rothschild 151 in citing an unpublished paper of gastwirth has noted that small specification errors for an assumed distribution can lead to substantial changes in expected number of searches and expected cost consequently the assumption of a known distribution of prices can have a profound effect on total cost 1 0022 053 l 8 l 040001 20 02 00 o

the barely revealed preference behind road investment priorities an attempt is made to reveal the preference of decision makers within the regional norwegian public roads administration the order of priority assigned to the respective competing public road investment opportunities within the various counties provinces is studied by means of a rank order multinomial logit model explanatory variables used include cost benefit and a variety of attributes characterizing the individual investment projects although statistically significant cost and benefit appear to be of only marginal importance for the priorities set more weight is attached to cost than to benefit smaller projects are preferred to larger given the benefit cost ratio in general the models estimated are able to explain only a relatively small share of the priority setting made

the ideology of efficiency searching for a theory of policy analysis the potential pareto improvement criterion and other measures of economic efficiency do not pass the test of consistency and coherence within economic theory nor do such measures accord with what public decision makers seek in policy advice from economists such efficiency measures are nonetheless durable components of the ideology of economics in general and benefit cost analysis in particular the objectivity of the policy scientist has been confused with the objectivity of the science while economic efficiency has no claim to objectivity the policy scientist can be an objective analyst of policy choices

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

cost benefit analysis of an infrastructure project and a cost reflective tariff a case study for investment in wastewater treatment plant in serbia to prevent the environment from being adversely affected by the disposal of insufficiently treated wastewater the european urban wastewater directive directives 91 271 eec and 98 15 eec emphasizes the need for secondary or more stringent treatment of urban wastewater in sensitive areas the eu water framework directive directive 2000 60 ec stresses the role of economic analysis to prevent the degradation and depletion of water resources the wastewater treatment process results in external benefits that should be quantified in order to assess the economic feasibility of a proposed project the principle of full cost recovery and the polluter pays principle are to be pursued using the european commission methodology for cost benefit analysis economic performance indicators of an infrastructure project in serbia requiring tertiary treatment of wastewater in a sensitive area are calculated to ensure a financial sustainability the authors assessed a cost reflective tariff to be introduced following the start of wastewater treatment plant operations the economic net present value is positive while the economic internal rate of return is greater than the social discount rate full cost recovery implies a significant tariff increase that should be taken into account by water authorities and companies as the project should not be only economically feasible but also socially affordable

opportunity cost of environmental conservation in the presence of externalities application to the farmed and wild salmon trade off in norway estimation of the opportunity cost is necessary for the economic assessment of environmental conservation policies this paper considers the case where an environmental good is negatively affected in the process of the production of marketable goods in the presence of externalities conservation implies the undertaking of abatement measures by polluters a relevant measure of opportunity cost in these settings is the abatement cost required to preserve or restore a unit of the environmental good in question current economic literature lacks an established methodology for deriving such measures as it commonly focuses on pricing pollutants rather than the natural stocks affected by them this paper uses a non optimal valuation approach suggested by fenichel and abbott jaere 1 1 2 1 27 2014 as a point of departure and develops a framework for deriving the opportunity cost of conservation as the cost of externality abatement per unit of environmental good an empirical illustration is provided for the case of the farmed and wild salmon trade off in norway in light of the current pollution control regulations

are people inequality averse or just risk averse individuals preferences for risk and inequality are measured through choices between imagined societies and lotteries the median relative risk aversion which is often seen to reflect social inequality aversion is between 2 and 3 most people are also found to be individually inequality averse reflecting a willingness to pay for living in a more equal society left wing voters and women are both more risk and inequality averse than others the model allows for non monotonic swfs implying that welfare may decrease with an individual s income at high income levels which is illustrated in simulations based on the empirical results

the numeraire matters in cost benefit analysis abstract the choice of numeraire is shown to be important in cost benefit analysis when a public good is involved individual consumers marginal rates of substitution will generally differ thus the less valuable the numeraire is to a person the higher the number required to express his net benefit and the more will his interest weigh in the total sum the choice of money as numeraire is systemetically favourable to those who value money the least relative to alternative numeraires

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

discrete time behavioral portfolio selection under cumulative prospect theory we formulate and study three multi period behavioral portfolio selection models under cumulative prospect theory i s shaped utility maximization without probability weighting in a market with one risky asset ii s shaped utility maximization without probability weighting in a market with multiple risky assets which follow a joint elliptical distribution and iii s shaped utility maximization with inverse s shaped probability weighting in a market with one risky asset for the first two time consistent models we identify the well posedness conditions and derive the semi analytical optimal policies for the third time inconsistent model we assume that the investor is aware of the time inconsistency but is unable to commit to his initial plan of action then we reformulate the model into an intrapersonal game model and derive the semi analytical subgame perfect nash equilibrium time consistent policy under well posedness condition all the three policies take a piecewise linear feedback form our analysis of the three models not only partially explains the well documented phenomena of non participation puzzle and horizon effect but also extends the two fund separation theorem into multi period s shaped utility setting and pushes forward the study on time inconsistency issue incurred by probability weighting

project analysis as input to public debate environmental valuation versus physical unit indicators abstract monetary valuation of environmental change is useful if one aims to rank alternative projects according to some specific social welfare function however if the project analysis is intended as background information to a democratic debate the advantages of monetary valuation are less obvious this paper analyzes aggregation of information taking normative disagreement explicitly into account it is demonstrated that monetary valuation is not always more informative than a physical unit measure of environmental change

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

efficiency and redistribution an evaluative review of louis kaplow s the theory of taxation and public economics louis kaplow proposes a two step methodology for normative policy analysis and illus trates it using various policy reforms the first step is to identify efficiency gains when hypothetical lump sum taxes can undo redistributive consequences the second step evaluates the redistributive effects using a strictly welfaristic social welfare function i critically review the foundations for kaplow s procedure and its reliance on strict welfarism i argue that basing efficiency gains on hypothetical lump sum tax adjust ments can lead to social welfare reducing policies if such tax adjustments are not car ried out i also indicate some conceptual problems with translating welfarism into policy evaluation when individuals have different utility function and review one promising alternative approach jel h20 h41 h50

misunderstanding of the binomial distribution market inefficiency and learning behavior evidence from an exotic sports betting market abstract this paper uses the setting of a volleyball game and an exotic sports betting on the point difference of volleyball games to test whether people correctly understand the probabilities related to outcomes of a process which follows a binomial distribution we find that people consistently underestimate the probabilities of outcomes that correspond to extreme ends of the distribution this is consistent with the extremeness aversion bias documented in decision making studies whereas previous studies on the extremeness aversion bias find the existence of the bias in a consumer choice setting we document that this bias also exists in an investment setting we find evidence of learning behavior over time however it is not sufficient to eliminate the bias

when saving is gambling abstract prize linked savings pls accounts which allocate interest using lottery payments rather than fixed interest encourage savings by appealing to households gambling preferences i introduce new data on casino cash withdrawals to measure gambling and examine how individual gambling expenditures respond to the introduction of pls in nebraska using a difference in differences design after pls is introduced individuals who live in counties that offer pls reduce gambling by at least 3 more than unaffected individuals the substitution effect is stronger in low frills gambling environments which most resemble pls indicating that these accounts fulfill the desire to gamble

until the bitter end on prospect theory in a dynamic context many economic and financial decisions depend crucially on their timing people decide when to invest in a project when to liquidate assets or when to stop gambling in a casino we provide a general result on prospect theory decision makers who are unaware of the time inconsistency induced by probability weighting if a market offers a sufficiently rich set of investment strategies then such naive investors postpone their stopping decisions indefinitely we illustrate the drastic consequences of this never stopping result and conclude that probability distortion in combination with naivete leads to unrealistic predictions for a wide range of dynamic setups

dynamic portfolio choice and asset pricing with narrow framing and probability weighting this paper shows that the framework proposed by barberis and huang 2009 to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and concave on gains we show that the addition of probability weighting and a convex concave value function reinforces previous applications of narrow framing and cumulative prospect theory to understanding the stock market non participation puzzle and the equity premium puzzle moreover we show that a convex concave value function generates new wealth effects that are consistent with empirical observations on stock market participation

good for the economy an ecological economics approach to analyzing alberta s bitumen industry abstract competing claims about the economic social and environmental impacts of bitumen projects make alberta s oilsands industry highly contentious this paper uses a case study of a major bitumen project shell canada s jackpine mine expansion to examine the evidence considered by government decision makers in the project approval process the project was determined to be in the public interest based primarily on its economic benefits despite significant adverse environmental and social impacts the paper evaluates the evidence that was presented to support this decision using three criteria drawn from ecological economics efficient allocation just distribution and sustainable macroeconomic scale it finds that the evidence presented is in fact insufficient to justify the project on any of the three criteria furthermore other studies of the bitumen industry cast doubt on the likelihood that the project would satisfy these criteria if further analysis were conducted it concludes by recommending several measures that could help to improve decision making on bitumen projects in the future

difference in preferences or multiple preference orderings comparing choices of environmental bureaucrats recreational anglers and the public abstract do environmental protection agency epa bureaucrats represent the general public or are they more in line with an interest group we study preferences for environmental policy using a choice experiment ce on three populations the general public swedish epa bureaucrats and recreational anglers we also test for existence of multiple preference orderings half of the respondents were asked to choose the alternatives that best corresponded with their opinion and the other half was asked to take the role of a policy maker and make recommendations for environmental policy the sepa bureaucrats have the highest marginal willingness to pay mwtp to improve environmental quality differences in mwtp are robust and not due to differences in socio economic characteristics across the populations we only found weak evidence of multiple preference orderings

distributional weights in environmental valuation and cost benefit analysis theory and practice abstract cost benefit analysis cba is built on the kaldor hicks efficiency criterion whereby projects that have aggregate positive net benefits are recommended even if those who lose are not compensated for their losses two kinds of problems can be identified with the use of the criterion first as income tends to affect monetary welfare changes positively the preferences of those with higher wealth have a larger weight in societal decision making second monetary welfare changes can be thought of as changes in real income which matter more for those with a lower initial wealth level both problems can be mitigated with distributional weighting despite their strong theoretical pedigree distributional weights have been largely neglected in practical cbas one exception being analyses in climate change economics we present the theory of distributional weighting and illustrate how weights can be applied empirically in an international environmental cba that deals with marine water quality improvements we show that different weighting schemes can result in different policy recommendations we also show that taking the income distribution within countries into account can change a country s willingness to participate in the water quality improvement program and that the income elasticity of willingness to pay wtp is an important indication of the direction of change

gambling in contests with heterogeneous loss constraints i study the impact of asymmetric loss constraints on risk taking behavior in the contest model of seel and strack 2013 i derive the unique nash equilibrium outcome the equilibrium payoffs and comparative statics about the bankruptcy risk

technical note path dependent and randomized strategies in barberis casino gambling model we consider the dynamic casino gambling model initially proposed by barberis 2012 and study the optimal stopping strategy of a precommitting gambler with cumulative prospect theory cpt preferences we illustrate how the strategies computed in barberis 2012 barberis n 2012 a model of casino gambling management sci 58 1 35 51 can be strictly improved by reviewing the betting history or by tossing an independent coin and we explain that the improvement generated by using randomized strategies results from the lack of quasi convexity of cpt preferences moreover we show that any path dependent strategy is equivalent to a randomization of path independent strategies

do financial markets reward buying or selling insurance and lottery tickets selling financial investments with insurance or lottery characteristics should earn positive long run premiums if investors like positive skewness enough to overpay for these characteristics the empirical evidence is unambiguous selling insurance and selling lottery tickets have delivered positive long run rewards in a wide range of investment contexts conversely buying financial catastrophe insurance and holding speculative lottery like investments have delivered poor long run rewards thus bearing small risks is often well rewarded bearing large risks not see comments and response on this article

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

a review article the case against the use of the sum of compensating variations in cost benefit analysis this paper presents a case against the use of the sum of compensating varia tions as a cost benefit test we argue that 1 the ethical judginents implied by the test are not defensible 2 positive sums of compensating variations occur without potential pareto improvements resulting in social preference reversals without simultaneous scitovsky re versals 3 when lump sum transfers are feasible a positive sum of compensating variations is necessary but not sufficient for a potential pareto improvement 4 in order to eliminate preference reversals and intransitivities all households must have almost identical quasi homothetic preferences a condition that is not satisfied in real economies