optimal dynamic pricing of inventories with stochastic demand over finite horizons in many industries managers face the problem of selling a given stock of items by a deadline we investigate the problem of dynamically pricing such inventories when demand is price sensitive and stochastic and the firm s objective is to maximize expected revenues examples that fit this framework include retailers selling fashion and seasonal goods and the travel and leisure industry which markets space such as seats on airline flights cabins on vacation cruises and rooms in hotels that become worthless if not sold by a specific time we formulate this problem using intensity control and obtain structural monotonicity results for the optimal intensity resp price as a function of the stock level and the length of the horizon for a particular exponential family of demand functions we find the optimal pricing policy in closed form for general demand functions we find an upper bound on the expected revenue based on analyzing the deterministic version of the problem and use this bound to prove that simple fixed price policies are asymptotically optimal as the volume of expected sales tends to infinity finally we extend our results to the case where demand is compound poisson only a finite number of prices is allowed the demand rate is time varying holding costs are incurred and cash flows are discounted the initial stock is a decision variable and reordering overbooking and random cancellations are allowed

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

what are asset demand tests of expected utility really testing assuming the classic contingent claim setting a number of financial asset demand tests of expected utility have been developed and implemented in experimental settings however the domain of preferences of these asset demand tests differ from the mixture space of distributions assumed in the traditional binary lottery laboratory tests of von neumann morgenstern expected utility preferences we derive new sets axioms that are necessary and sufficient for preferences over contingent claims to be representable by an expected utility function we also indicate the additional axioms required to extend the representation to the more general case of preferences over risky prospects

parametric recoverability of preferences revealed preference theory is brought to bear on the problem of recovering approximate parametric preferences from consistent and inconsistent consumer choices we propose measures of the incompati

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

does consumer sentiment forecast household spending if so why in the three months following the iraqi invasion of kuwait the university of michigan s index of consumer sentiment ics fell an unprecedented 24 3 index points to its lowest level since the 1981 1982 recession this collapse in household confidence became the focus of a great deal of economic commentary and indeed frequently was cited as an important if not the leading cause of the economic slowdown that ensued concern was fueled by the well known contemporaneous correlation between the ics and the growth of household spending figure 1 shows quarterly averages of the index 1978 1993 together with the quarterly growth in real personal consumption expenditures as measured in the national income accounts bureau of economic analysis the correlation is impressive of course it is not surprising that sentiment and the growth of spending are positively correlated this correlation may simply reflect that when economic prospects are poor households curtail their spending and also give gloomy responses to interviewers thus the contemporaneous correlation between sentiment and spending does not refute traditional life cycle or permanentincome models of consumption nor does it necessarily make the job of forecasting changes in consumption any easier from the point of view of an economic forecaster the questions of interest are first whether an index of consumer sentiment has any predictive power on its own for future changes in consumption spending and second whether it contains information about future changes in consumer spending aside from the information contained in other available indicators in section i we present evidence that the answer to the first question is a clear yes we find that lagged values of the ics taken on their own explain about 14 percent of the variation in the growth of total real personal consumption expenditures over the post1954 period further investigation shows that the answer to the second question is probably yes as well though here the margin is narrower and the evidence more murky the ics contributes about 3 percent to the r2 of a simple reduced form equation for total personal consumption expenditures in the longer of the two sample periods we examine but nothing in the shorter sample period though the latter result is heavily influenced by the observation for 1980 2 for the major subcategories of spending the contribution generally ranges between 1 percent and 8 percent overall we read the evidence as pointing toward at least some significant incremental explanatory power therefore we take as given for the remainder of the paper that sentiment forecasts spending and we turn to the issue of how that statistical relationship should be interpreted one possible interpretation is that sentiment is an independent driving factor in the economy and that changes in carroll division of research and statistics stop 80 federal reserve board washington dc 20551 fuhrer research department federal reserve bank of boston boston ma 02106 wilcox division of monetary affairs stop 71 federal reserve board washington dc 20551 we have benefited from the research assistance of stephen helwig and christopher geczy and the comments of an anonymous referee the views expressed in this paper are those of the authors and not of the federal reserve board the federal reserve bank of boston or the other members of the staff of either institution ithe conference board s consumer confidence index also plunged at the same time

adaptive ordering and pricing for perishable products we consider the combined problem of pricing and ordering for a perishable product with unknown demand distribution and censored demand observations resulting from lost sales faced by a monopolistic retailer we develop an adaptive pricing and ordering policy with the asymptotic property that the average realized profit per period converges with probability one to the optimal value under complete information on the distribution the pricing mechanism is modeled as a multiarmed bandit problem while the order quantity decision made after the price level is established is based on a stochastic approximation procedure with multiplicative updates

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

future capacity procurements under unknown demand and increasing costs in this paper we study a situation in which a broker must manage the procurement of a short life cycle product as the broker observes demand for the item she learns about the demand process however as is often the case in practice it becomes either more difficult or more expensive to procure the item as the selling season advances thus the broker must trade off higher procurement costs against the benefit of making ordering decisions with better information about demand problems of this type arise for example in the travel industry where a travel agent s cost of procuring airline and hotel reservations increases as the date of a vacation package approaches we develop a newsvendor like characterization of the optimal procurement policy in a numerical analysis we demonstrate how broker procurements tend to cluster just before price increases and how brokers can benefit from explicitly considering the effects of information about demand in their ordering policies

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

closing the gap a learning algorithm for lost sales inventory systems with lead times we consider a periodic review single product inventory system with lost sales and positive lead times under censored demand in contrast to the classical inventory literature we assume the firm d

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

comparative performances of measures of consumer and economic sentiment in forecasting consumption a multi country analysis this paper seeks to compare the capabilities of assorted measures of consumer and economic sentiment in predicting the growth of household expenditure an analysis of quarterly data on five europea

how general are risk preferences choices under uncertainty in different domains we analyze the extent to which individuals choices over five employer provided insurance coverage decisions and one 401 k investment decision exhibit systematic patterns as would be implied by a general utility component of risk preferences we provide evidence consistent with an important domain general component that operates across all insurance choices we find a considerably weaker relationship between one s insurance decisions and 401 k asset allocation although this relationship appears larger for more financially sophisticated individuals estimates from a stylized coverage choice model suggest that up to thirty percent of our sample makes choices that may be consistent across all six domains

afriat in the lab varian 1988 showed that the utility maximization hypothesis cannot be falsified when only a subset of goods is observed we show that this result does not hold under the assumptions that unobserved prices and expenditures remain constant these assumptions are naturally satisfied in laboratory settings where the world outside the lab remains unchanged during the experiment hence for so called induced budget experiments the generalized axiom of revealed preference is a necessary and sufficient condition for utility maximization in general not just over lab goods lab experiments are therefore a valid tool to put the utility maximization hypothesis to the test

measuring rationality with the minimum cost of revealed preference violations abstract we introduce a new measure of how close a set of choices is to satisfying the observable implications of rationality and apply it to a large balanced panel of household level consumption data this new measure the minimum cost index is the minimum cost of breaking all revealed preference cycles found in choices from budget sets unlike existing measures of rationality it responds to both the number and severity of revealed preference violations

bayes solution to dynamic inventory models under unknown demand distribution this paper considers the periodic review inventory problem for which one or more parameters of the demand distribution are unknown with a known prior distribution chosen from the natural conjugate

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

who is more rational we report on the results of a large scale field experiment that enables us to test for consistency with utility maximizing behavior and to investigate the correlation between individual behavior and demographic and economic characteristics we conducted the experiment with the centerpanel a representative sample of over 2 000 dutch households using procedures similar to those used by choi et al 2007b in a setting with risk we find a high level of consistency in the individual level decisions there is also considerable heterogeneity in subjects consistency scores high income and high education subjects display greater levels of consistency men are more consistent than women and young subjects are more consistent than those who

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

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

incomplete market demand tests for kreps porteus selden preferences abstract what does utility maximization subject to a budget constraint imply for intertemporal choice under uncertainty assuming consumers face a two period consumption portfolio problem where asset markets are incomplete we address this question following both the standard local infinitesimal and finite data approaches to focus on the separate roles of time and risk preferences individuals maximize kps kreps porteus selden preferences the consumption portfolio problem is decomposed into a one period portfolio problem and a two period certainty consumption saving problem we derive demand restrictions which are necessary and sufficient for portfolio choices and certainty intertemporal consumption to have been generated by maximization respectively of a one period expected utility representation and a certainty representation of time preferences conditions are provided for recovering the building block time and risk preference utilities for the finite data case we derive a set of linear inequalities that are necessary and sufficient for observations to be consistent with the maximization of kps utility

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

the anatomy of distributional preferences with group identity abstract the increasing diversity of societies raises questions about the consequences for redistributive preferences this paper assesses the impact of social identity on distributional preferences in a modified dictator game i estimate individual level utility functions with two parameters that govern the trade offs between equity and efficiency and giving to self and to other subjects on average put less weight on income of the out group the out group treatment also changes the distribution of equity efficiency concerns however the experiment also uncovers a large individual heterogeneity of preferences an analysis of garp violations reveals that choices in both treatments overwhelmingly stem from well behaved yet systematically different underlying utility functions hence the evidence presented here suggests that the rational choice approach is a useful tool for understanding the effect of social identity on preferences

measuring individual risk attitudes when preferences are imprecise there is widespread interest in measuring risk attitudes and incorporating such measures into broader econometric analyses we consider three elicitation procedures currently in use we find considerable variability within and even more between the results they produce we suggest that this reflects the way that different instruments interact with imprecise underlying preferences the short run implication is that such procedures need to be used with caution and are likely to be highly context specific the longer run implication is that adding white noise to deterministic models is inadequate we need to develop models that allow for imprecision and procedural variation

poverty and economic decision making evidence from changes in financial resources at payday we study the effect of financial resources on decision making low income u s households are randomly assigned to receive an online survey before or after payday the survey collects measures of cognitive function and administers risk and intertemporal choice tasks the study design generates variation in cash checking and savings balances and expenditures before payday participants behave as if they are more present biased when making intertemporal choices about monetary rewards but not when making intertemporal choices about non monetary real effort tasks nor do we find before after differences in risk taking the quality of decision making the performance in cognitive function tasks or in heuristic judgments

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

can consumer confidence forecast household spending evidence from the european commission business and consumer surveys 1 introductionthe analysis of the impact of consumer attitudes on consumer spending has been an area of sustained interest in the macroeconomics literature this interest in consumer attitudes reflects a popular belief that macroeconomic outcomes depend heavily on consumers expectations of future economic conditions reinforcing this belief is the fact that consumer spending accounts for 60 to 70 of the gross domestic product of highly industrialized countries such as the g 7 during the past few decades a number of single country investigations have attempted to assess the predictive power of consumer confidence in forecasting household spending for example in the united states mishkin 1978 reports that the index of consumer sentiment ics published by the university of michigan possesses good explanatory power for changes in durable goods carroll fuhrer and wilcox 1994 also find that the michigan ics has good predictive capability with regard to household expenditure but that its forecasting power decreases considerably when the index is used along with other macroeconomic variables 1 kwan and cotsomitis 2004 examine the robustness of carroll fuhrer and wilcox s 1994 findings when alternative measures of consumer confidence are used in their prediction equations they report that use of the michigan index of consumer expectations improves on the estimation results of carroll fuhrer and wilcox 1994 bram and ludvigson 1998 and ludvigson 2004 compare the forecasting performance of the michigan ics and the u s conference board s index of consumer confidence icc their findings indicate that the conference board s index provides additional information about future consumer consumption that is not captured by the michigan index however chopin and darrat 2000 utilizing a multivariate causality framework report that the conference board s icc is an unreliable predictor of u s retail sales as regards other studies using non u s data acemoglu and scott 1994 employ granger causality and regression analyses to determine if consumer confidence as measured by the gallup poll in the united kingdom can predict future consumption they find that consumer confidence is a leading indicator of future consumption growth in a subsequent study delorme kamerschen and voeks 2002 examine whether consumer confidence and rational expectations are the same in the united kingdom as they are in the united states they report that the predictive ability of the u k consumer confidence index is greater than that of the united states belessiotis 1996 using french data also reports that the consumer confidence index provides decent explanatory power for future consumer spending in canada kwan and cotsomitis 2005 find that although consumer sentiment is a reliable predictor of consumer expenditures at the national level results obtained using regional data are quite mixed fan and wong 1998 find that unlike the case in the united states or the united kingdom confidence indicators in hong kong have little or no explanatory power in forecasting household spending the existing studies on the ability of consumer confidence to predict household spending have produced mixed results the results vary depending on the sample period chosen the frequency of observations monthly or quarterly and the different survey methodologies employed to gauge consumer attitudes moreover most of these studies confine their attention to single country investigations given the diversity of results it is important to investigate the predictive power of consumer confidence on the basis of comparable time series data for as many countries as possible this paper presents a first formal attempt to study the ability of consumer confidence to forecast household spending within a multicountry framework to this end we use two confidence indices namely the consumer confidence indicator cci and the economic sentiment indicator esi both of which are derived from the european commission business and consumer survey ecbcs

risk tolerance and entrepreneurship a theoretical tradition argues that more risk tolerant individuals are more likely to become entrepreneurs but perform worse we test and confirm these predictions with several risk tolerance proxies using investment data for 400 000 individuals we find that common stock investors are around 50 more likely to subsequently start up a firm firms started up by common stock investors have about 25 lower sales and 15 lower return on assets the results are similar using personal leverage and other risk tolerance proxies we do not find support for alternative explanations such as unobserved wealth or behavioral effects

nonparametric comparative revealed risk aversion abstract we introduce a nonparametric method to compare risk aversion of different investors based on revealed preference methods using yaari s 1969 50 definition of more risk averse than we show that it is sufficient to compare the revealed preference relations of two investors this makes the approach operational the central rationalisability theorem provides strong support for this approach we also provide a measure of economic significance to quantify the differences in risk aversion which can also help to interpret differences in risk aversion in parametric models the approach is an alternative or complement to parametric approaches and a robustness check as a necessary first step towards this comparative approach we show how to test data for consistency with stochastic dominance relations which can also be used to recover larger parts of preferences we include an application to experimental data by choi et al 2007 10 11 which demonstrates the potential of the comparative approach

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

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

would information on consumer confidence have helped to predict uk household expenditure during the recent economic crisis abstractthe objective is to investigate whether access to data on consumer confidence would have aided forecasts of the growth of uk household consumption expenditure over the recent period of economic crisis a disaggregated study is performed on the basis that consideration is given not only to household spending in total but also to expenditure on each of durable goods semi durable goods nondurable goods and services the empirical analysis demonstrates how modifications which are made to the harmonized indicator of the european commission are able to enhance predictive accuracy however the benefit which is derived from consulting consumer survey data does not extend to an earlier interval over which the behaviour of consumer sentiment was far less volatile

afriat s theorem and some extensions to choice under uncertainty the first part of the paper reviews the methodology developed by sydney afriat for determining whether a finite set of price and quantity data are consistent with utility maximizing behavior by a consumer some extensions of his basic model to models of consumer behavior where the structure of preferences is restricted in some way are also explained examples of special structures are homotheticity separability and quasilinearity of the utility function the second half of the paper is devoted to developing afriat type consistency tests for expected and nonexpected utility maximizing behavior

adaptive data driven inventory control with censored demand based on kaplan meier estimator using the well known product limit form of the kaplan meier estimator from statistics we propose a new class of nonparametric adaptive data driven policies for stochastic inventory control problems we focus on the distribution free newsvendor model with censored demands the assumption is that the demand distribution is not known and there are only sales data available we study the theoretical performance of the new policies and show that for discrete demand distributions they converge almost surely to the set of optimal solutions computational experiments suggest that the new policies converge for general demand distributions not necessarily discrete and demonstrate that they are significantly more robust than previously known policies as a by product of the theoretical analysis we obtain new results on the asymptotic consistency of the kaplan meier estimator for discrete random variables that extend existing work in statistics to the best of our knowledge this is the first application of the kaplan meier estimator within an adaptive optimization algorithm in particular the first application to stochastic inventory control models we believe that this work will lead to additional applications in other domains

hyperbolic discounting and the standard model eliciting discount functions abstract experiments on static intertemporal choice find evidence of particularly extreme impatience toward immediate rewards while this is often taken as support for hyperbolic discounting it could also arise because the most likely participants in experiments may be those with the most immediate need for money we conduct a calibration exercise and find that the extreme impatience observed in experiments can be accommodated by a standard exponential discounting model with no discounting and expectation of a small increase in the base consumption level the calibration uses existing estimates of curvature of utility

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

children s rationality risk attitudes and field behavior abstract we investigate the relationship between risk attitudes choice consistency and field behavior of children by conducting economic experiments with 1275 8th graders choices are not completely consistent with any of the economic theories we consider however they are not random either we use our experimental data to structurally estimate risk preferences and correct for decision error using a measure constructed from the estimates and individual choices we find that risk preferences do predict future field behavior children who are more risk averse are less likely to receive disciplinary referrals one and two years after the experiment and are more likely to complete high school even controlling for economic rationality family background scholarly achievement and past misbehavior accounting for decision error turns out to be important as a simple aggregate measure of risk is not found to be correlated with field behavior

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

a comprehensive approach to revealed preference theory we develop a version of afriat s theorem that is applicable in a variety of choice environments beyond the setting of classical consumer theory this allows us to devise tests for rationalizability in environments where the set of alternatives is not the positive orthant of a euclidean space and where the rationalizing utility function is required to satisfy properties appropriate to that environment we show that our results are applicable amongst others to choice data on lotteries contingent consumption and intertemporal consumption

disappointment aversion term structure and predictability puzzles in bond markets we solve a dynamic equilibrium model with generalized disappointment aversion preferences and continuous state endowment dynamics we apply the framework to the term structure of interest rates and

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

asset demand based tests of expected utility maximization we provide conditions under which contingent claim and asset demands are consistent with state independent expected utility maximization the paper focuses on the case of a single commodity and demands are allowed to be functions of probabilities and not just prices and income we extend prior analyses by deriving three distinct tests for demands to be rationalized by expected utility i a contingent claim analogue to the certainty strong axiom of revealed preference ii a characterization of the functional form for demand and iii necessary and sufficient conditions based on the slutsky matrix jel d01 d11 d81 the neoclassical certainty model of consumer behavior postulates that a consum er s demand can be described as having been derived from utility maximization sub ject to a budget constraint one is then naturally led to ask what this model implies about observed demand behavior this question has been addressed using two quite distinct approaches the first originating in the work of slutsky 1915 and antonelli 1886 derives necessary and sufficient conditions for utility maximization assum ing knowledge of the consumer s demand functions the second approach known as revealed preference following the classic work of samuelson 1938 provides necessary and sufficient restrictions on a finite set of demand price pairs such that the demand behavior of a consumer is consistent with utility maximization in this paper we extend both approaches to a classic portfolio choice problem where consumers possess state independent expected utility preferences and there is a single commodity in each state we focus only on the complete market case where the financial asset setting is equivalent to the contingent claim setting and hence it is only necessary to discuss demand tests for the latter we depart from the standard contingent claim theory by assuming that state of nature probabilities are not fixed and we model demand as a function of probabilities as well as prices and income for the revealed preference approach with the restriction of a single commodity in each state we derive a much simpler test for expected utility maximization than those that currently exist in the literature for example the formulation of green and

revising commitments field evidence on the adjustment of prior choices the very poor in developing countries often make intertemporal choices that seem at odds with their individual self interest there are many possible reasons why this paper investigates several of these reasons with a lab in the field experiment in rural malawi involving large stakes it makes two contributions first it constructs a new dependent variable revisions of prior choices regarding the allocation of future income this allows us to directly examine intertemporal choice revision and its determinants in particular this dependent variable permits a novel test for the existence of self control problems it turns out revisions of money allocations toward the present are positively associated with measures of present bias from an earlier baseline survey as well as the randomly assigned closeness in time to the first possible date of money disbursement second the paper investigates other potential determinants of revision aside from self control problems it finds little evidence that revisions of money allocations toward the present are associated with spousal preferences for such revision household shocks or the financial sophistication of respondents

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

robust multi item newsboy models with a budget constraint abstract in this paper we present robust newsboy models with uncertain demand the traditional approach to describing uncertainty is by means of probability density functions in this paper we present an alternative approach using deterministic optimization models we describe uncertainty using two types of demand scenarios namely interval and discrete scenarios for interval demand scenarios we only require a lower and an upper bound for the uncertain demand of each item while for discrete demand scenarios we require a set of likely demand outcomes for each item using the above scenarios to describe demand uncertainty we develop several minimax regret formulations for the multi item newsboy problem with a budget constraint for the problems involving interval demand scenarios we develop linear time optimal algorithms we show that the corresponding models with discrete demand scenarios are np hard and that they are solvable by dynamic programming finally we extend the above results to the case of mixed scenarios where the demand of some of the items is described by interval scenarios and the demand of the remaining items is described by discrete scenarios

myopic policies for some inventory models with uncertain demand distributions the majority of papers on stochastic inventory theory make the assumption that the distribution of consumer demand in each time period is known with certainty while this assumption is unsupported in many applied contexts it is conventionally held that more realistic models are more difficult to solve and will not yield simple operational policies this paper shows that a simple inventory policy based upon a critical fractile can be optimal or near optimal in some inventory models with parameter adaptive demand processes in these some parameter of the demand distribution is not known with certainty and estimates of the parameter are updated in a statistical fashion as demand is observed through time examples include exponentially smoothed forecasts and bayesian updating of parameter estimates bounds on the value loss relative to optimal cost when using the critical fractile policy can be calculated directly from the problem data some numerical examples illustrate the technique

optimal pricing and lot sizing under conditions of perishability and partial backordering we formulate a generalized model of dynamic pricing and lot sizing by a reseller who sells a perishable good we assume that when it is economic to backlog demand the reseller can plan for periods of shortage during which demand can be partially backordered when the good is highly perishable the reseller may need to backlog demand in order to market the good at a reasonable price we present a simple solution procedure for solving the optimization problem the procedure entails solving first a single nonlinear equation and then if required two nonlinear equations

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

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

risk preferences are not time preferences reply can the well known experimental phenomenon of present bias in intertemporal choice be confounded with the risks associated with receiving payment can measurements of risk preferences be used to represent desires for smoothness in intertemporal payments in our two 2012 papers in this journal we explored these two questions and found the answer to the first to be yes and the second to be no we feel the three papers inspired by our work and published here underscore these arguments and point to interesting new possibilities for modeling and measuring risk over time jel c91 d81 d91

attention in games an experimental study abstract a common assumption in game theory is that players concentrate on one game at a time however in everyday life we play many games and make many decisions at the same time and have to decide how best to divide our limited attention across these settings in this paper we ask how players solve this attention allocation problem we find that players attention is attracted to particular features of the games they play and how much attention a subject gives to a given game depends on the other game that the person is simultaneously attending to

dynamic pricing and ordering decisions by a monopolist this paper considers the relationship between pricing and ordering decisions for a monopolistic retailer facing a known demand function where over the inventory cycle the product may exhibit i physical decay or deterioration of inventory called wastage and ii decrease in market value called value drop associated with each unit of inventory on hand the retailer is allowed to continuously vary the selling price of the product over the cycle we introduce a notion of instantaneous margin and use it to derive profit maximizing conditions for the retailer the model explains the markdown of retail goods subject to decay it also provides guidance in determining when price changes during the cycle are worthwhile due to product aging how often such changes should be made and how such changes affect ordering intervals and quantities