competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

the influence of probability on risky choice a parametric examination abstract the appeal of expected utility theory as a basis for a descriptive model of risky decision making has diminished as a result of empirical evidence which suggests that individuals do not behave in a manner consistent with the prescriptive tenets of eut in this paper we explore the influence of probability on risky choice by proposing and estimating a parametric model of risky decision making our results suggest that models which provide for probability transformations are most appropriate for the majority of subjects further we find that the transformation differs for most subjects depending upon whether the risky outcomes are gains or losses most subjects are considerably less sensitive to changes in mid range probability than is proposed by the expected utility model and risk seeking behavior over long shot odds is common

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky behavior

risk aversion in a dynamic asset allocation experiment we conduct a controlled laboratory experiment in the spirit of merton 1971 in which subjects dynamically choose their portfolio allocation between a risk free and risky asset using the optimal allocation of an investor with hyperbolic absolute risk aversion hara utility we fit the experimental choices to characterize the risk profile of our participants despite substantial heterogeneity decreasing absolute risk aversion and increasing relative risk aversion are the predominant types we also find some evidence of increased risk taking after a gain finally the session level risk attitudes show a different profile than the individual descriptions of risk attitudes

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

the role of career and wage incentives in labor productivity evidence from a two stage field experiment in malawi we study how career and wage incentives affect labor productivity through self selection and incentive effect channels using a two stage field experiment in malawi first recent secondary school g

indecisiveness undesirability and overload revealed through rational choice deferral three reasons why decision makers may defer choice are indecisiveness between various feasible options unattractiveness of these options and choice overload this paper provides a choice theoretic explanation for each of these phenomena by means of three deferral permitting models of decision making that are driven by preference incompleteness undesirability and complexity constraints respectively these models feature rational choice deferral in the sense that whenever the individual does not defer he chooses a most preferred feasible option as a result choices are always consistent with the weak axiom of revealed preference the three models suggest novel ways in which observable data can be used to recover preferences as well as their indecisiveness desirability and complexity components or thresholds several examples illustrate the relevance of these models in empirical and theoretical applications

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

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

do rational demand functions differ from irrational ones evidence from an induced budget experiment various studies e g becker 1962 ariely et al 2003 have noted anomalies concerning the relationship between observed demand and the preferences presumed to motivate it we re examine these findings using experimental choice data after separating our subjects choices into rational and irrational subsets based on consistency with the axioms of revealed preference we estimate and compare demand coefficients mirroring ariely et al s coherently arbitrary choice both rational and irrational demand estimates exhibit negative price and positive endowment coefficients however a comparison of the full set of demand coefficients indicates significant differences between the two yielding an observable artefact of the preference hypothesis relaxing the goodness of fit of the revealed preference test afriat 1987 varian 1994 does not alter our findings

directly unproductive profit seeking dup activities this paper propses directly unproductive profit seeking dup activities as a general concept that embraces a wide range of recently analyzed economic activities including the subset of rent seeking activities considered by krueger it then proceeds to provide a synthesis and generalization of the welfare theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the dup activity thus a unification and overview of the subject are achieved

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

does africa need a rotten kin theorem experimental evidence from village economies this paper measures the economic impact of social pressure to share income with kin and neighbors in rural kenyan villages the authors conduct a lab experiment in which they randomly vary the observability of investment returns the goal is to test whether subjects reduce their income in order to keep it hidden the analysis finds that women adopt an investment strategy that conceals the size of their initial endowment in the experiment although that strategy reduces their expected earnings this effect is largest among women with relatives attending the experiment parameter estimates suggest that women behave as though they expect to be pressured to share four percent of their observable income with others and substantially more when close kin can observe income directly although this paper provides experimental evidence from a single african country observational studies suggest that similar pressure from kin may be prevalent in many rural areas throughout sub saharan africa

revealing preferences graphically an old method gets a new tool kit because uncertainty is endemic in a wide variety of economic circumstances models of decision making under uncertainty play a key role in every field of economics the standard model of decisions under uncertainty is based on von neumann and morgenstern expected utility theory eut so it is natural that experimentalists should want to test the empirical validity of the savage axioms on which eut is based empirical violations of eut provoke intriguing questions about the rationality of individual behavior and at the same time raise criticisms about the status of the savage axioms as the touchstone of rationality these criticisms have generated the development of various theoretical alternatives to eut and the investigation of these theories has led to new empirical regularities for the most part these experimental investigations use several pairwise choices a la allais to test eut and its various alternatives such as weighted utility implicit expected utility and prospect theory among others each of these theories gives rise to indifference curves with distinctive shapes in some part of the marschak machina probability triangle so each theory can be tested against the others by choosing alternatives that the various theories rank differently in these studies the criterion used to evaluate a theory is the fraction of choices it predicts correctly generally speaking experimental work has on the one hand collected only a few decisions from each subject and on the other presented subjects with a serious of choices designed to compare the predictive abilities of competing theories or discover violations of specific axioms colin f camerer 1995 and chris starmer 2000 review the experimental and theoretical work that focuses on evaluating non eut theories although this practice is understandable given the purposes for which the experiments were designed critics say that it limits the usefulness of the data for other purposes first while these experiments reveal that violations exist they give us little sense of how important they are or how frequently they

risk averse behavior in generalized matching pennies games in experimental studies of behavior in 2 2 games with unique mixed strategy equilibria observed choice frequencies are systematically different from mixed strategy nash predictions this paper examines experimental results for a variety of such games and shows that a structural econometric model which incorporates risk aversion into a quantal response equilibrium explains the data very well moreover risk aversion estimates are stable across the different games and are close to those obtained from laboratory and field auction data as well as from individual lottery choice experiments

an experiment on the efficiency of bilateral exchange under incomplete markets abstract we test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market in this model traders choose asset holdings constrained by a technology frontier next each trader experiences a random shock which makes only one type of asset profitable in a general equilibrium environment with incomplete markets this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal this behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices we find that when markets are incomplete a bilateral exchange can slightly mitigate the extent of pecuniary externalities and weakly increase welfare

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

nonlinear behavior in sealed bid first price auctions the extent to which the behavior of people is consistent with game theoretic principles is investigated in a first price sealed bid auction environment three linear rules of thumb with increasing complexity are used as benchmarks to gauge the accuracy of the constant relative risk aversion model crram in addition the crram is tested against the relaxation of the rational expectation hypothesis existing competitive bidding experiments cannot clearly distinguish between game theoretic models and linear markdown rules on an individual level within the parametric environments studied and reported in the experimental literature game theoretic solutions are linear over the range of private values in which bid functions are estimated in this study agents drew values from non uniform distributions as a result the game theoretic bidding behavior is nonlinear due to the nonlinearity special econometric and numerical techniques are applied to solve the model and obtain the estimates the crram exhibits good fit of the data the pseudo r2 is greater than 0 8 in 90 percent of the subjects the crram is more accurate than the markdown model mm and the simple ad hoc model simam but not as accurate as the sophisticated ad hoc model sop am the data also supports the relaxation of the rational expectation hypothesis and suggests that substantial increases in the predictive power of game theoretic models can be gained from improvements in the theory of belief formation

are risk preferences stable across contexts evidence from insurance data using a unique dataset we test whether households deductible choices in auto and home insurance reflect stable risk preferences our test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household coverage specific poisson processes we find that the hypothesis of stable risk preferences is rejected by the data our analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices our results are robust to several alternative modeling assumptions jel d11 d83

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

homothetic efficiency theory and applications we provide a nonparametric revealed preference approach to demand analysis based on homothetic efficiency homotheticity is widely assumed often implicitly because it is a convenient and often useful restriction however this assumption is rarely tested and data rarely satisfy testable conditions to overcome this we provide a way to estimate homothetic efficiency of consumption choices the method provides considerably higher discriminatory power against random behavior than the commonly used afriat efficiency we use experimental and household survey data to illustrate how our approach is useful for different empirical applications and can provide greater predictive success

predictive power in behavioral welfare economics when choices appear inconsistent duet obehavioral biases there is a theoretical debate about whether or not it is necessary to impose the structure of a model in order to provide meaning ful welfare guidance based on such choices to address this question empirically we evaluate the predictive power of the model free and non parametric approach to welfare analysis proposed by bernheim and rangel 2009 in two standard choice settings we show that for most hypothetical demands this approach does not offer clear welfare guidance however we find that for most observed demands this approach can be used to make tight predictions even though these demand functions exhibit inconsistencies for the experimental choices of manzini and mariotti 2010 we show that the welfare guidance provided by these predictions is consistent with delaya version eventhough the guidance provided by revealed preferences is more ambiguous

risk aversion and wealth evidence from person to person lending portfolios we estimate risk aversion from investors financial decisions in a person to person lending platform we develop a method that obtains a risk aversion parameter from each portfolio choice since the same individuals invest repeatedly we construct a panel data set that we use to disentangle heterogeneity in attitudes toward risk across investors from the elasticity of risk aversion to changes in wealth we find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housing wealth shock thus investors exhibit preferences consistent with decreasing relative risk aversion and habit formation data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2317 this paper was accepted by amit seru finance

attitudes towards large income risk in welfare states an international comparison using survey data and the instrument developed by barsky et al we estimate the distribution of attitudes towards income risk in a country where many employment and health related risks are generously covered by a tax financed social insurance system norway in 2006 under a constant relative risk aversion assumption the sample average for the coefficient of relative risk aversion is 3 8 with standard deviation 2 3 this number is then contrasted to that for five other oecd countries where risk attitudes have been measured using the same instrument and also prior to the financial crisis chile france italy the netherlands and the usa when we relate this distribution for stated relative risk aversion to that for generosity of social insurance and the risks related to employment and health expenditure a picture emerges suggesting that more extensive welfare states induce higher risk tolerance for foreground risks a relationship that is in line with the theory on risk vulnerability

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

revealed preferences over risk and uncertainty ludovic renou would like to acknowledge financial support from the french national research agency anr under the grant cigne anr 15 ce38 0007 01

consistency and heterogeneity of individual behavior under uncertainty by using graphical representations of simple portfolio choice problems we generate a very rich dataset to study behavior under uncertainty at the level of the individual subject we test the data for consistency with the maximization hypothesis and we estimate preferences using a two parameter utility function based on faruk gul 1991 this specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory the parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population

resaleable debt and systemic risk many debt claims such as bonds are resaleable whereas others such as repos are not there was a fivefold increase in repo borrowing before the 2008 crisis why did banks dependence on non resaleable debt precipitate the crisis in this paper we develop a model of bank lending with credit frictions the key feature of the model is that debt claims are heterogeneous in their resaleability we find that decreasing credit market frictions leads to an increase in borrowing via non resaleable debt borrowing via non resaleable debt has a dark side it causes credit chains to form since if a bank makes a loan via non resaleable debt and needs liquidity it cannot sell the loan but must borrow via a new contract these credit chains are a source of systemic risk since one bank s default harms not only its creditors but also its creditors creditors overall our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low