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

bounded rationality climate risks and insurance is there a market for natural disasters this paper examines the role of insurances to reduce uncertainty associated with climate change losses for individuals of special interest is the value individuals place on the reduction of increased flood risks by insurance coverage using rank dependent utility and prospect theories risk premiums are estimated under different climate change scenarios for the netherlands the study delivers two main insights first estimation results suggest that a profitable flood insurance market could be feasible second climate change has the potential to increase the profitability of offering flood insurance 2009 by the board of regents of the university of wisconsin system

risk averters that love risk marginal risk aversion in comparison to a reference gamble we propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles we measure marginal risk aversion in two dimensions mean and variance data from a field experiment is used to study marginal risk aversion our results suggest that individuals rely on a reference gamble when assessing marginal risk individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior copyright 2008 oxford university press

women business owners a source of stability during the great recession during the period of the great recession previous research has found that women owned firms were less likely to lay off workers than were firms owned by men given that the individual firm behavio

lottery dependent utility in this paper we propose a model for decision making under risk that is capable of predicting empirically observed preference patterns that have been found to be incompatible with the expected utility model the model departs from the classical expected utility model by allowing utilities to depend on the lottery the dependence of utilities on the lottery being evaluated is achieved by restricting the utility measure to a convenient parametric family of functions the idea then is to use each lottery to determine a specific parameter value thus characterizing the utility function for each particular lottery the expected value of this lottery dependent utility function provides the overall measure of preference the model retains the properties of transitivity stochastic dominance and continuity it also permits types of analyses such as exploitation of basic attitudes toward risk through risk aversion properties that have been found useful in decision theory the primary use of our model is in descr

why and how does shared language affect subsidiary knowledge inflows a social identity perspective extending existing international business ib research we conceptualize shared social identity as an outcome rather than only an antecedent of multinational enterprise knowledge flows to provide an alternative reason for why such knowledge flows occur we further argue that shared language among subsidiary and headquarters hq managers is an insufficient condition for subsidiary knowledge receipt accordingly we develop a moderated mediation model at the subsidiary level to examine how shared language affects subsidiaries tacit knowledge inflows from hq specifically we study 1 whether this relationship is mediated by the extent to which subsidiary managers share hq goals and vision and the extent to which human resources decisions are centralized at hq and 2 whether subsidiary type greenfields vs acquisitions moderates these mediated relationships such that in both cases the mediation will be stronger in foreign acquisitions compared with foreign greenfields building on a sample of 817 subsidiaries in 9 countries regions and a novel subjective measure of shared language we find support for our model implications for research on hq subsidiary knowledge flows social identity theory and the literature on sociolinguistics and international human resource management are discussed and managerial implications outlined

travel time and the liability of distance in foreign direct investment location choice and entry mode measures of geographic distance are often used to proxy for the impact of spatial separation on firm decisions and performance we develop a construct dyad travel time to measure the friction of interacting and costs of uncertainty from ex post behavioral monitoring across non collocated sites we measure the actual time required to travel between 1171 parent subsidiary dyads and show that dyad travel time but not geographic distance has significant predictive power in firm governance and location decisions while prior literature has independently modeled these we specify a simultaneous model offering stronger support for the interrelation of these decisions

risk and rationality the effects of mood and decision rules on probability weighting empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects but little is known about factors influencing the shape of the probability weighting curve based on a laboratory experiment with monetary incentives we demonstrate that pre existing good mood is significantly associated with women s probability weights women in a better than normal mood tend to weight probabilities relatively more optimistically many men however seem to be immunized against effects of incidental mood by applying a mechanical decision criterion such as maximization of expected value

modeling risk aversion in economics to capture the risk aversion intuition the standard approach in economics has been to utilize the model of expected utility in which risk aversion derives from diminishing marginal utility for wealth or diminishing marginal utility for aggregate consumption the expected utility model for risk aversion has been used to derive many important insights but over the years economists and psychologists have identified various problematic issues with expected utility as a descriptive model of choice in this article we urge economists to take seriously the research agenda of developing and assessing different ways to model risk aversion we proceed in three main steps first we highlight that the basic intuition of risk aversion that drives many results in economics is not intimately tied to expected utility second we describe a few alternative models that can also capture the basic intuition of risk aversion finally we discuss that while expected utility and the alternative models might all capture the basic intuition of risk aversion the alternative models can generate additional more nuanced implications not shared with expected utility that in some cases seem to be borne out by data we emphasize that these alternative models also are not perfect and further research is needed to identify even better approaches

some remarks on quiggin s anticipated utility abstract this remark proves that quiggin s anticipated utility function may solve the allais paradox and the common ratio effect for some generalizations of these it is needed to assume that the decision weight function is concave

experienced vs described uncertainty do we need two prospect theory specifications this paper reports on the results of an experimental elicitation at the individual level of all prospect theory components i e utility loss aversion and weighting functions in two decision contexts situations where alternatives are described as probability distributions and situations where the decision maker must experience unknown probability distributions through sampling before choice for description based decisions our results are fully consistent with prospect theory s empirical findings under risk furthermore no significant differences are detected across contexts as regards utility and loss aversion whereas decision weights exhibit similar qualitative properties across contexts typically found under prospect theory our data suggest that for gains at least the subjective treatment of uncertainty in experience based and description based decisions is significantly different more specifically we observe a less pronounced overweighting of small probabilities and a more pronounced underweighting of moderate and high probabilities for experience based decisions on the contrary for losses no significant differences were observed in the evaluation of prospects across contexts this paper was accepted by george wu decision analysis

the multinational corporation as a multilingual community language and organization in a global context this paper develops a framework for analyzing the multinational corporation mnc as a multilingual community in which parent functional language and subunit functional languages are concurrently used and recursively linked through an intra corporate communication network the unit breadth and intensity of an mnc s language system are designed to apply global strategies within the context of evolving environmental and organizational realities to the extent that language design is the product of deliberate choice we suggest that headquarters functional language is determined by the mnc s international strategy organizational structure and transnationality while subunit functional language is designed in accordance with organizational form strategic role and expatriate deployment aligning language systems with organizational strategy and dynamics improves mnc communication coordination and knowledge sharing

ambiguity about audit probability tax compliance and taxpayer welfare we show that an increase in uncertainty about the probability of being audited ambiguity increases tax compliance for ambiguity averse taxpayers but reduces compliance for ambiguity lovers because experimental evidence reveals considerable heterogeneity with respect to ambiguity preferences we conclude that fostering uncertainty about the probability of being audited may not be an effective policy for increasing taxpayer compliance moreover because the tax authority can neither categorize nor screen taxpayers on the basis of their preferences for ambiguity it is not likely to be either a useful or a desirable instrument for increasing taxpayer welfare jel h26 d81

retail banking and behavioral financial engineering the case of structured products abstract we apply cumulative prospect theory and hedonic framing to evaluate discount reverse convertibles drcs and reverse convertible bonds rcbs as important examples of structured products from a boundedly rational investor s point of view while common expected utility theory would also conclude that drcs and rcbs are of interest to investors with moderate return expectations and underestimated stock return volatility that theory would overestimate the market success of drcs and underestimate that of rcbs in comparison to a situation with bounded rationality hedonic framing and relatively low subjectively felt competence levels of investors are decisive for the demand for rcbs

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

theories of choice under risk insights from financial markets abstract to date the plausibility of theories of choice under risk hinges are mainly on experimental evidence this paper devises and implements an approach amenable of assessing the performance of three families of models expected utility rank dependent expected utility and the cumulative prospect theory using information from financial asset markets our findings unequivocally support reference point dependence diminishing marginal sensitivity loss aversion and nonlinear weighting of gain and loss physical probabilities the empirical observations are found to be robust to inter alia the parameterization of the utility and probability weighting functions day of the week effects the choice of a reference point and the introduction of possible low probability market crashes peso component

knowledge transfer in multinational corporations productive and counterproductive effects of language sensitive recruitment this paper focuses on the multifaceted role of language and language sensitive recruitment in knowledge transfer in multinational corporations mncs in particular we develop a framework that helps to better understand how language sensitive recruitment is related to competence networks identity and power we started by conducting a qualitative interview based study of 101 mnc subsidiaries this analysis elucidates the productive and counterproductive effects of language sensitive recruitment on knowledge transfer related to communication competence networks identity and power to further understand the productive and counterproductive effects we conducted a quantitative study in 285 mnc subsidiaries we found an inverted u shaped relationship between language sensitive recruitment and knowledge transfer together these two studies provide a better understanding of the multifaceted and at times counterintuitive implications of language sensitive recruitment on knowledge transfer in mncs by elucidating these effects this paper contributes to the stream of research examining the role of language in mncs and international business more generally it further adds to research on mnc knowledge transfer that to date has focused little attention on language by elaborating on the potential unintended consequences of language sensitive recruitment this paper also has implications for international human resource management research

risk taking for oneself and others a structural model approach economic theory makes no predictions about social factors affecting decisions under risk we examine situations in which a decision maker decides for herself and another person under conditions of payoff equality and compare them to individual decisions by estimating a structural model we find that responsibility leaves utility curvature unaffected but accentuates the subjective distortion of very small and very large probabilities for both gains and losses we also find that responsibility reduces loss aversion but that these results only obtain under some specific definitions of the latter these results serve to generalize and reconcile some of the still largely contradictory findings in the literature they also have implications for financial agency which we discuss

is knowledge power knowledge flows subsidiary power and rent seeking within mncs in recent years as multinational corporation mnc subsidiaries have become more closely linked to international networks their knowledge intensity has risen and some of their r d has gained a more creative role simultaneously and often connectedly many subsidiaries have acquired considerable strategic independence in all aspects of their operations and therefore are able to exercise considerable intra firm bargaining power to influence the distribution of the firm s resources in this context we suggest that intra mnc knowledge flows are a key determinant of subsidiary bargaining power we argue that subsidiary managers can exploit such power to pursue their own ends such rent seeking behavior is implicit in much of the literature on managerialism but our analysis suggests that such behavior can now occur in headquarters subsidiary and subsidiary subsidiary relations thus subsidiary strategic independence designed to enhance the competitiveness of outputs market knowledge and inputs asset seeking and learning can be corroded when the pursuit of subsidiary objectives encourages rent seeking empirical analysis of a sample of high technology subsidiaries in the uk provides strong support for the theory we examine several avenues whereby the incentives of units within the mnc can be aligned

consumer value maximizing sweepstakes and contests abstract sweepstakes and contests are some of the most frequently used promotional tools consumers participating in sweepstakes or contests have an opportunity to win prizes through a random draw the authors examine how commonly used sweepstakes formats that vary in the number of winners and the allocation of the total reward money among the winners affect consumer valuations of the promotion given a fixed amount of reward money the authors examine alternative reward formats based on the promotional objectives consumer risk aversion and degree of subadditivity they test the analytical results using an experimental approach

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

can prospect theory be used to predict an investor s willingness to pay abstract cumulative prospect theory cpt is widely considered to be the most successful descriptive theory for decision making under risk and uncertainty sophisticated methods have been developed to reliably elicit cpt parameters on an individual basis the aim of this paper is to analyze whether such methods are suited to be applied in real world situations particularly in the context of investment counseling for retail investors specifically we examine whether cpt parameters elicited via standardized computer tools are successful in predicting an individual s preference for different structured financial products surprisingly we find only low predictive power of the elicited cpt parameters on the wtp using a second set of experiments we examine possible explanations for the low prediction quality overall we have to conclude that it is too much of a leap to draw conclusions about the attractiveness of complex financial products from cpt parameters elicited via simple lotteries

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

portfolio insurance and prospect theory investors popularity and optimal design of capital protected financial products abstract portfolio insurance strategies are used on both the institutional and the retail side of the asset management industry while standard utility theory struggles to provide an explanation this study justifies the popularity of portfolio insurance strategies in a behavioral finance context we run monte carlo simulations as well as historical simulations for popular portfolio insurance strategies and benchmark strategies in order to evaluate the outcomes using cumulative prospect theory our simulation results indicate that most portfolio insurance strategies are the preferred investment strategy for a prospect theory investor moreover the analysis provides insights into how portfolio insurance products should be designed and structured to meet the preferences of prospect theory investors as accurately as possible

pricing strategies and mechanism choice in reward based crowdfunding abstract with consideration of the ambiguity and overfunding effects this study develops generalized models to compare the sequential and simultaneous mechanisms in reward based crowdfunding ambiguity effect is a negative psychological perception of customers since they lack the information to infer the product s quality however overfunding effect is a positive psychological perception that enhances customers confidence in the product s quality theoretically we show that the two mechanisms may dominate each other in terms of entrepreneur and the two opposite effects can play significant roles in deciding the optimal crowdfunding mechanism furthermore we propose a simple compensation mechanism to improve entrepreneur s expected payoff and the crowdfunding s success rate under both mechanisms finally we analyse the informational cascade in crowdfunding and show how entrepreneur can use this phenomenon to maximize her expected payoff

why do retired workers claim their social security benefits so early a potential explanation based on the cumulative prospect theory abstractsocial security provides longevity insurance for older americans according to expected utility theory models rational households who are not liquidity constrained should delay claiming th

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

reconsiderations in the foundations of decision under uncertainty an explosion has occurred during the past decade in the foundations of decision making under risk and uncertainty the long dormant challenges of allais i 953a b to the von neumann morgenstern i944 independence axioms of allais and of ellsberg 1 96 i to savage s i 954 sure thing principle and of may 1954 and tversky i969 to the transitivity of preferences have sprung to new life through widespread empirical corroboration in the wake of the new evidence an array of representations of preferences has been proposed to accommodate failures of one or more of the traditional axioms 2 although some new models are solely descriptive kahneman and tversky 1979 others have normative interest as competitors of the von neumannmorgenstern expected utility theory quiggin i982 machina i982 chew i982 i983 fishburn i982 or of savage s subjective probability expected utility theory bell i982 loomes and sugden i982 i987 schmeidler i984 gilboa i985 luce and narens i985 fishburn i984 b i986b one benefit of recent foundational work is a deeper understanding of the content and implications of expected utility coupled with a new appreciation of the underlying issues that divided decision theorists a generation ago i am thinking especially of the 1952 paris colloquium on decision under uncertainty allais 1979 pp 446 7 at which allais confronted defenders of expected utility de finetti friedman marschak samuelson savage with his insistence on riskless measurement of the utility of wealth and violations of independence axioms the colloquium appears to have ended in a standoff but enabled each side to sharpen its own position

do prediction markets produce well calibrated probability forecasts this article presents new theoretical and empirical evidence on the forecasting ability of prediction markets we develop a model that predicts that the time until expiration of a prediction market should negatively affect the accuracy of prices as a forecasting tool in the direction of a favourite longshot bias that is high likelihood events are underpriced and low likelihood events are over priced we confirm this result using a large data set of prediction market transaction prices prediction markets are reasonably well calibrated when time to expiration is relatively short but prices are significantly biased for events farther in the future when time value of money is considered the miscalibration can be exploited to earn excess returns only when the trader has a relatively low discount rate

explaining the energy efficiency gap expected utility theory versus cumulative prospect theory abstract energy efficiency is one of the key factors in mitigating the impact of climate change and preserving non renewable resources although environmental and economic justifications for energy efficiency investments are compelling there is a gap between the observable and some notion of optimized energy consumption the so called energy efficiency gap behavioral biases in individual decision making have been resonated by environmental research to explain this gap to analyze the influence of behavioral biases on decisions upon energy efficiency investments quantitatively we compare expected utility theory with cumulative prospect theory on basis of a real world example we illustrate how the extent of the gap is influenced by behavioral biases such as loss aversion probability weighting and framing our findings indicate that cumulative prospect theory offers possible explanations for many barriers discussed in literature for example the size of the gap rises with increased risk and investment costs because behavioral biases are systematic and pervasive our insights constitute a valuable quantitative basis for environmental policy measures such as customer focused and quantitatively backed public awareness campaigns financial incentives or energy savings insurances in this vein this paper may contribute to an accelerated adaption of energy efficiency measures by the broader public