a comparison of alternative covariance matrices for models with over lapping observations abstract this paper investigates the relative performance of alternative covariance matrices for models with over lapping observations commonly used in the finance literature the alternative covariance matrices used are those of hansen 1982 newey and west 1987 bartlett and quadratic spectral qs weights and andrews and monahan 1992 qs weights all matrices produce standard errors which are too small yielding empirical size probabilities above their corresponding theoretical values even in large samples empirical examples such as testing efficiency in the foreign exchange market and mean reversion in stock prices show that the choice of covariance matrix can affect the outcome of a hypothesis test

the effect of collusion on efficiency in experimental auctions abstract this paper examines the effect of collusion on allocative efficiency in a second price sealed bid auction in which bidders valuations have both private and common value components we present a theoretical model which shows that explicit collusion improves average efficiency furthermore a reduction in common value signal variance increases the efficiency of allocations when a cartel is present we test for the presence of these patterns in a laboratory experiment subjects can choose whether to compete or to form a cartel colluding bidders can communicate and make side payments using a knockout auction our results show that a large majority of bidders joins a cartel and collusion has a negative impact on efficiency

on eliciting beliefs in strategic games several recent studies in experimental economics have tried to measure beliefs of subjects engaged in strategic games with other subjects using data from one such study we conduct an experiment where our experienced subjects observe early rounds of strategy choices from that study and are given monetary incentives to report forecasts of choices in later rounds we elicit beliefs using three different scoring rules linear logarithmic and quadratic we compare forecasts across the scoring rules and compare the forecasts of our trained observers to forecasts of the actual players in the original experiment we find significant differences across scoring rules the improper linear scoring rule produces forecasts closer to 0 and 1 than the proper rules and these forecasts are poorly calibrated the two proper scoring rules induce significantly different distributions of forecasts we find that forecasts by observers under both proper scoring rules are significantly different from the forecasts of the actual players in terms of accuracy calibration and the distribution of forecasts we also find evidence for belief convergence among the observers

preference heterogeneity in experiments comparing the field and laboratory do laboratory experiments provide a reliable basis for measuring field preferences economists recognize that preferences can differ across individuals but only a few attempts have been made to elicit individual preferences for representative samples of a population in a particular geographical area region or country our primary objective is to directly compare estimates of preferences elicited from a convenience sample and the estimates for the wider population from which that sample is drawn we examine the strengths and weaknesses of laboratory and field experiments to detect differences in preferences over risk and time that are associated with standard observable characteristics of the individual

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

monotone stochastic choice models the case of risk and time preferences suppose that when evaluating two alternatives x and y by means of a parametric utility function low values of the parameter indicate a preference for x and high values indicate a preference for y

risk preferences around the world we present results from a large scale international survey on risk preferences conducted in 53 countries in all countries we find on average an attitude of risk aversion in gains and of risk seeking in losses the degree of risk aversion shows significant cross country differences moreover risk attitudes in our sample depend not only on economic conditions but also on cultural factors as measured by the hofstede dimensions individualism and uncertainty avoidance the data may also serve as an interesting starting point for further research on cultural differences in behavioral economics data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1869 this paper was accepted by peter wakker decision analysis

similarities in the distribution of stock market price changes between the eighteenth and twentieth centuries are all financial time series alike this article raises that question by establishing that eighteenth and twentieth century equity market time series behave similarly the distribution of price changes now and then both exhibit the same patterns or regularities in particular the distribution of price changes is leptokurtic and fluctuations in variance are persistent this article provides further evidence that financial market regularities are stable and not contingent on specific times and places the historical evidence shows that eighteenth century stock market and traders are not so different from those of today copyright 1998 by university of chicago press

framing effects and impatience evidence from a large scale experiment we confront a representative sample of 1102 dutch individuals with a series of incentivized investment decisions and also elicit their time preferences there are two treatments that differ in the frequency at which individuals decide about the invested amount the low frequency treatment stimulates decision makers to frame a sequence of risky decisions broadly rather than narrowly we find that the framing effect is significantly larger for impatient than for patient individuals this result is robust to controlling for various economic and demographic variables and for cognitive ability

patterns in three centuries of stock market prices this article applies autoregression and rescaled range statistics to very long stock market series to test the hypothesis that long term temporal dependencies are present in financial data for the annual capital appreciation returns to the london stock exchange evidence of persistence in raw returns greater than five years and of mean reversion in deviations from rolling twenty year averages is found similar patterns are observed for the new york stock exchange however they are not significant at traditional confidence levels copyright 1993 by university of chicago press

an experimental test of combinatorial information markets while a simple information market lets one trade on the probability of each value of a single variable a full combinatorial information market lets one trade on any combination of values of a set of variables including any conditional or joint probability in laboratory experiments we compare the accuracy of simple markets two kinds of combinatorial markets a call market and a market maker isolated individuals who report to a scoring rule and two ways to combine those individual reports into a group prediction we consider two environments with asymmetric information on sparsely correlated binary variables one with three subjects and three variables and the other with six subjects and eight variables thus 256 states

common persistence in conditional variances since the introduction of the autoregressive conditional heteroskedastic arch model in engle 1982 numerous applications of this modeling strategy have already appeared a common finding in many of these studies with high frequency financial or monetary data concerns the presence of an approximate unit root in the autoregressive polynomial in the univariate time series representation for the conditional second order moments of the process as in the so called integrated generalized arch igarch class of models proposed in engle and bollerslev 1986 in the igarch models shocks to the conditional variance are persistent in the sense that they remain important for forecasts of all horizons this idea is readily extended to a multivariate framework even though many time series may exhibit persistence in variance it is likely that several different variables share the same common long run component in that situation the variables are naturally defined to be co persistent in variance and the co persistent linear combination is interpretable as a long run relationship conditions for co persistence to occur in the multivariate linear garch model are presented these conditions parallel the conditions for linear co integration in the mean as developed by engle and granger 1987 the presence of co persistence has important implications for asset pricing relationships and in optimal portfolio allocation decisions an empirical example relating to the time series properties of nominal u s dollar exchange rates for the deutschemark and the british pound provides a simple illustration of the ideas

long horizon mean reverting stock prices revisited this paper reexamines long horizon stock returns and finds that previous work overstates the evidence of mean reversion the overstatement is largely due to the implicit weighting of ordinary least squares tests which place more weight on the depression and world war ii observations which have both large error variances and stronger mean reverting tendencies additionally the reliance on asymptotic statistics and the improper focus on only the most negative estimates of mean reversion contribute to the overstatement using generalized least squares randomization tests on the 1926 to 1987 period the random walk cannot be rejected for value or equally weighted real returns at any of 10 return horizons or by joint tests over all 10 horizons simultaneously additionally the random walk cannot be rejected for the extended 1871 to 1987 period

overcoming coordination failure in a critical mass game strategic motives and action disclosure abstract we study whether coordination failure is more often overcome if players can disclose their actions at a lower cost in an experiment subjects first choose their action and then choose whether to disclose this action to other group members and disclosure costs are varied between treatments we find that no group overcomes coordination failure when action disclosure costs are high but half of the groups do so when the costs are low simulations with a belief learning model can predict which groups will overcome coordination failure but only if it is assumed that players are either farsighted risk seeking or pro social to distinguish between these explanations we collected additional data on individual preferences and the degree of farsightedness we find that in the low cost treatment players classified as more farsighted more often deviate from an inefficient convention and disclose this action while the effect of risk and social preferences is not significant

non insurance markets loss size manipulation and competition experimental evidence the common view that buyer power of insurers may effectively counteract provider market power critically rests on the idea that consumers and insurers have a joint interest in extracting price concessions however in markets where the buyer is an insurer the interests of insurers and consumers to reduce prices may be importantly misaligned the positive dependence between loss size and the insurer s expected profits limits the insurer s incentives to reign in loss sizes in markets with small initial loss sizes insurers may try to raise these in order to create demand for insurance after having defined insurance and non insurance markets based on the initial loss size we develop theory to show that insurers with buyer power have incentives to create insurance markets insurer competition will push their profits to zero but markets do not return to the initial non insurance state this constitutes a welfare loss we design experimental insurance markets to test our theory and find support monopolistic insurer subjects in non insurance markets increase loss sizes to establish insurance markets insurer competition eliminates profits but not the loss size to uninsured consumers this provides an additional reason to be careful in granting insurers buyer power jel classification c92 d81 g22 i11 l13

decisions error and heterogeneity probabilistic choices or choice errors may play an important supporting role in shaping observed risky choices and a variety of restrictions on such choice probabilities play the role of identifying restrictions in empirical decision research we test six restrictions in the context of common ratio effect data for a general class of theories of risky choice two restrictions one for aggregate and one for individual data are supported but none of the heterogeneity restrictions that make the aggregate data model powerful survive scrutiny nor do estimable parametric versions of the individual data model there is room for new stochastic identifying restrictions in empirical decision research

option markets and implied volatility past versus present abstract traders in the nineteenth century appear to have priced options the same way that twenty first century traders price options empirical regularities relating implied volatility to realized volatility stock prices and other implied volatilities including the volatility skew are qualitatively the same in both eras modern pricing models and centralized exchanges have not fundamentally altered pricing behavior but they have generated increased trading volume and a much closer conformity in the level of observed and model prices the major change in pricing is the sharp decline in implied volatility relative to realized volatility evident immediately upon the opening of the cboe

consumer perception of deposit insurance little awareness limited effectiveness the empirical findings on bank runs and market discipline are at odds with the theoretical predictions from the literature at least in emerging markets using unique survey data from the netherlands we explore two possible explanations deposit holders may have limited knowledge of deposit insurance di schemes or they may not fully trust these schemes to be executed faithfully we find that knowledge on the eligibility for di is limited particularly when it concerns minor banks nevertheless households with more deposits have better knowledge of the di scheme and show higher levels of trust in addition deposit holders generally expect an associated payback time that well exceeds the time it has taken to pay back depositors in the past moreover consumers believe repayment is more likely and faster for large systemic banks these results confirm that both households awareness of the coverage and trust in the operations of the di scheme are suboptimal

how strategic are children and adolescents experimental evidence from normal form games abstract we examine the strategic sophistication of 196 children and adolescents aged 10 17 years in experimental normal form games besides choices we also elicit first and second order beliefs the share of subjects playing nash or expecting opponents to play nash is fairly stable across all age groups the likelihood of playing best response to own beliefs increases in math skills using a mixture model about 40 of subjects are classified as a strategic type while the others are non strategic the distribution of types is somewhat changing with age the estimated error rates also show some dependency on age and gender

robust self scheduling under price uncertainty using conditional value at risk in a deregulated power industry power producing companies bid in the hour ahead and day ahead power markets in an attempt to maximize their profit for a successful bidding strategy each power producing company has to generate bidding curves derived from an optimal self schedule this self schedule is commonly obtained from a profit maximizing optimal power flow model based on predicted locational marginal prices lmps however at the time of self scheduling the predicted values of the lmps are largely uncertain therefore it is desired to produce robust self schedules that can be used to lessen the risk resulting from exposure to fluctuating prices in portfolio optimization theory methods of risk management include value at risk var and conditional value at risk cvar cvar is known to be a more consistent measure of risk than var in fact whilst cvar is the mean excess loss the var provides no indication on the extent of losses that might be suffered beyond the amount indicated by this measure this research proposes a method for robust self scheduling based on cvar it will be shown that polynomial interior point methods can be used to obtain the robust self schedules from a second order cone program the obtained schedules provide a compromise solution between maximum profit and minimum risk simulation results on a standard ieee bus test system will be used to demonstrate the scheduling model based on cvar

do individuals have preferences used in macro finance models an experimental investigation recent financial studies often assume that agents have epstein zin preferences preferences that require agents to care about when uncertainty is resolved under this recursive preference framework the preference for uncertainty resolution is entirely determined by an agent s preferences for risk and intertemporal substitution to test the implications of this model this paper presents an experiment designed to elicit subject preferences on risk time intertemporal substitution and uncertainty resolution results reveal that most subjects prefer early resolution of uncertainty and have relative risk aversion greater than the reciprocal of the elasticity of intertemporal substitution consistent with the predictions by recursive preferences subjects are classified in a finite mixture model by their risk time and intertemporal substitution parameters regression results show that types predicted by the epstein zin model to prefer early resolution choose early resolution with 20 50 higher probabili

outcome manipulation in corporate prediction markets this paper presents a framework for applying prediction markets to corporate decision making the analysis is motivated by the recent surge of interest in markets as information aggregation devices and their potential use within firms we characterize the amount of outcome manipulation that results in equilibrium and the impact of this manipulation on market prices jel d71 d82 d83 d84

beliefs and actions in the trust game creating instrumental variables to estimate the causal effect in many economic contexts an elusive variable of interest is the agent s expectation about relevant events e g about other agents behavior recent ex perimental studies as well as surveys have asked participants to state their beliefs explicitly but little is known about the causal relation between beliefs and other behavioral variables this paper discusses the possibility of creating exogenous in strumental variables for belief statements by shifting the probabilities of the rele vant events we conduct trust game experiments where the amount sent back by the second player trustee is exogenously varied by a random process in a way that informs only the rst player trustor about the realized variation the procedure allows detecting causal links from beliefs to actions under plausible assumptions the iv estimates indicate a signi cant causal eect comparable to the connection between beliefs and actions that is suggested by ols analyses

application of information gap decision theory to risk constrained self scheduling of gencos in a competitive electricity market a generation company genco optimizes its operation schedules referred to as self scheduling in order to maximize its profit however various sources of uncertainty such as market price fluctuations or forced outage of generating units may impact the genco s profit in this paper a non probabilistic information gap model is proposed to model the uncertainties in short term scheduling of a genco the self scheduling problem is formulated for risk neutral risk averse and risk seeker gencos robustness of the decisions against low market prices are evaluated using a robustness model furthermore windfall higher profit due to unpredicted higher market prices is modeled using an opportunity function the proposed models are applied to a 54 unit thermal genco

preferences dependent learning in the centipede game the persistence of mistrust abstract a candidate explanation for the persistence of heterogeneous behavior in a sequential social dilemma played many times is the existence of heterogeneous preferences preferences dependent conjectures about opponents behavior are an additional source of heterogeneity by behaving differently different preference types acquire different information thus when observing only outcomes of own past interactions heterogeneous and possibly wrong conjectures about opponents strategies may endogenously arise and persist in a centipede game experiment played for forty rounds we manipulate the type of ex post information and the method of play we find that when the game is played in its reduced normal form and subjects have only access to personal statistics heterogeneity of behavior across preference types persists in the long run in this case behavior resembles a self confirming equilibrium selfish subjects take at earlier nodes due to an unjustified lack of trust when subjects have also access to public statistics heterogeneity disappears selfish subjects tend to pass more often and play moves towards bayes nash equilibrium

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

a large scale test of the effects of time discounting risk aversion loss aversion and present bias on household adoption of energy efficient technologies abstract this paper empirically and jointly analyses the relations between standard time discounting risk aversion loss aversion and present bias and household stated adoption of low to high stake energy efficiency technologies eets light emitting diodes leds energy efficient appliances and retrofit measures the analysis relies on a large representative sample drawn from eight european union countries preferences over time risk and losses were elicited and jointly estimated from participant choices in incentivized context free multiple price list experiments the findings from econometrically estimating eet adoption equations provide some support for the hypothesis that individuals who are more loss averse or more risk averse or who exhibit a lower time discount factor are less likely to have adopted eets yet some of the results significance levels and effect sizes appeared sensitive to the addition of covariates which may be an indication of bad controls finally omitting one or several of the parameters capturing preferences over time risk and losses when estimating the eet adoption equations did not appear to cause omitted variable bias

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

are stock returns predictable a test using markov chains this paper uses a markov chain model to test the random walk hypothesis of stock prices given a time series of returns a markov chain is defined by letting one state represent high returns and the other represent low returns the random walk hypothesis restricts the transition probabilities of the markov chain to be equal irrespective of the prior years annual real returns are shown to exhibit significant nonrandom walk behavior in the sense that low high returns tend to follow runs of high low returns in the postwar period

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

deciding for others reduces loss aversion we study risk taking on behalf of others both when choices involve losses and when they do not a large scale incentivized experiment with subjects randomly drawn from the danish population is conducted we find that deciding for others reduces loss aversion when choosing between risky prospects for which losses are ruled out by design subjects make the same choices for themselves as for others in contrast when losses are possible we find that the two types of choices differ in particular we find that subjects who make choices for themselves take less risk than those who decide for others when losses loom this finding is consistent with an interpretation of loss aversion as a bias in decision making driven by emotions and that these emotions are reduced when making decisions for others

subjective probabilities in games an application to the overbidding puzzle this article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games we conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first price auctions the experimental outcomes indicate that subjects underestimate their probability of winning the auction and indeed overbid when provided with feedback on the precision of their predictions subjects learn to make better predictions and to curb significantly overbidding the structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding and that risk aversion plays a lesser role than previously believed

a search for long memory in international stock market returns abstract a major issue in financial economics is the behavior of stock returns over long as opposed to short horizons this study provides empirical evidence from the perspective of long memory analysis international evidence on long memory is explored using the morgan stanley capital international stock index data for eighteen countries two tests that are robust to short term dependence and conditional heteroskedasticity are employed a modified rescaled range test and a fractional differencing test the empirical results in general provide little support for long memory in international stock returns the findings are not sensitive to inflation adjustments in stock returns data sources and statistical methods used

efficient market hypothesis evidence from a small open economy this article studies the efficient market hypothesis for the istanbul stock exchange national 100 isen 100 price index within the lumsdaine and papell two structural breaks unit root test framework the main finding of the article shows that the isen 100 index is characterized by a unit root with two structural breaks which is consistent with the efficient market hypothesis in addition the article applies the augmented dickey fuller test runs test and the variance ratio test to test the weak form efficiency of the isen 100 the analyses are repeated for three sub periods delineated in view of the endogenously determined break points

leveraging entrepreneurship through private investments does gender matter using project data from a random sample of phase ii research awards from the national institutes of health sbir program we estimate the relative probability that woman owned firms are able to attract private investments to fund the transition of the technology developed under the sponsorship of the sbir program to an innovation to enter the market we find that women owned firms are as much as 16 points less likely to attract private investment dollars compared to male owned firms factors excluding the size of the sbir award held constant women owned firms that received larger awards performed substantially better although the sbir program has a legislated directive to increase the participation of woman owned firms in the program our findings suggest that it might not be sufficient to overcome market perceptions about the profitability of such investments actually bringing a developed technology to market

optimal forecasting incentives an agent of unknown expertise is requested to forecast the mean of an uncertain outcome the agent can refine forecasts at a constant marginal cost per unit precision but neither cost nor precision can be verified by the planner the problem is to induce both truthful revelation and an appropriate degree of learning so as to minimize the expected sum of direct planning losses and agent payments optimal contracts are derived with and without self screening of expertise and with and without competition between agents self screening tends to be much less valuable than competition

the equity premium stock and bond returns since 1802 1992 the equity premium stock and bond returns since 1802 financial analysts journal vol 48 no 1 pp 28 38 46

the price is right updating inflation expectations in a randomized price information experiment abstract using a unique randomized information experiment embedded in a survey this paper investigates how consumers inflation expectations respond to new information we find that respondents on average update their expectations in response to certain types of information and do so sensibly in a manner consistent with bayesian updating as a result of information provision the distribution of inflation expectations converges toward its center and cross sectional disagreement declines we document heterogeneous information processing by gender and present suggestive evidence of respondents forecasting under asymmetric loss our results provide support for expectation formation models in which agents form expectations rationally but face information constraints

commodities for the long run using a novel dataset consisting of daily futures prices going back to 1877 we find that returns of commodity futures indices have on average been positive over the long run although return premiums are associated with both carry and spot returns commodity returns in different economic states inflation up down expansion recession vary mostly as a result of moves in the underlying spot price these economic states are important drivers of commodity returns even after conditioning on whether commodity markets are in backwardation or contango the evidence supports commodities as a potentially attractive asset class in portfolios of stocks and bonds

incorporating a stochastic element into decision theories abstract recent papers by harless and camerer 1994 and hey and orme 1994 have employed two rather different models of errors in decision making under uncertainty the present paper develops a third approach and shows how different stochastic specifications of the same deterministic core theory may generate very different and sometimes surprising hypotheses

eliciting beliefs proper scoring rules incentives stakes and hedging accurate measurements of probabilistic beliefs have become increasingly important both in practice and in academia introduced by statisticians in the 1950s to promote truthful reports in simple environments proper scoring rules psr are now arguably the most popular incentivized mechanisms to elicit an agent s beliefs this paper generalizes the analysis of psr to richer environments relevant to economists more speci cally we combine theory and experiment to study how beliefs reported with a psr may be biased when i the psr payments are increased ii the agent has a nancial stake in the event she is predicting and iii the agent can hedge her prediction by taking an additional action our results reveal complex distortions of reported beliefs thereby raising concerns about the ability of psr to recover truthful beliefs in general economic environments

stereotypes and false consensus how financial professionals predict risk preferences abstract we analyze the prediction of risk preferences of others using an artefactual field experiment with financial professionals and students for their prediction the subjects receive information on multiple demographic characteristics and a self assessment of risk taking of the target when analyzing the predictions we find three significant effects subjects use the demographic information for stereotyping as well as the target s self assessment on risk taking and we find a considerable false consensus effect the false consensus effect is the strongest for experienced professionals regarding the prediction s accuracy we find that the forecasts of the professionals are more accurate than the forecasts of the students

a controlled field experiment on corruption abstract this paper reports on a controlled field experiment on corruption designed to address two important issues the experimenter s scrutiny and the unobservability of corruption in the experiment a grader is offered a bribe along with a demand for a better grade we find that graders respond more favorably to bigger bribes while the effect of higher wages is ambiguous it lowers the bribe s acceptance but it fosters reciprocation monitoring and punishment can deter corruption but we cannot reject that it may also crowd out intrinsic motivations for honesty when intensified finally our results suggest several micro determinants of corruption including age ability religiosity but not gender

understanding joint retirement abstract evidence from different sources shows that spouses retirement decisions are correlated retirement policies affecting individuals in couples are therefore also likely to affect behavior of their spouses it is therefore important to account for joint features in modeling retirement this paper studies a structural collective model of labor supply and retirement of both partners in a couple with interdependent preferences imperfect knowledge of preferences of the spouse and subjective expectations about the future we propose a novel method to estimate preferences and the intra household bargaining process which relies on stated preferences data collected in the health and retirement study respondents were asked to choose between hypothetical retirement trajectories describing the retirement ages and replacement rates of both spouses from three perspectives considering their own preferences only the preferences of their spouse only or the most likely decision for the household with these data all model parameters are identified and potential sources of joint retirement can be disentangled our results suggest that males misperceive their wives preferences overestimating their disutility of work our estimates correct for this we find strong positive correlations between preferences for joint leisure leisure complementarity of the two partners counterfactual simulations with stylized retirement paths suggest that the leisure complementarities explain a substantial part of joint retirement much more than correlation in unobserved heterogeneity or potential wage rates

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

a markov model of heteroskedasticity risk and learning in the stock market abstract we examine a variety of models in which the variance of a portfolio s excess return depends on a state variable generated by a first order markov process a model in which the state is known to economic agents is estimated it suggests that the mean excess return moves inversely with the level of risk we then estimate a model in which agents are uncertain of the state the estimates indicate that agents are consistently surprised by high variance periods so there is a negative correlation between movements in volatility and in excess returns

risk constrained profit maximization in day ahead electricity market the deregulation of the electricity industry has caused for the generation company genco the need of tools for measuring and managing the risk beyond the classical problem of generating unit scheduling in this paper a probabilistic framework for the problem of managing risk faced by gencos trading in day ahead energy market is proposed in particular a stochastic forecast of electricity price and the technical features of hydrothermal units are considered the approach is based on an optimization procedure for maximizing expected profits in the presence of risk constraints conditional value at risk for the distribution of daily profit is used as risk measure

psychological expected utility theory and anticipatory feelings we extend expected utility theory to situations in which agents experience feelings of anticipation prior to the resolution of uncertainty we show how these anticipatory feelings may result in time inconsistency we provide an example from portfolio theory to illustrate the potential impact of anticipation on asset prices

confidence and decision making in experimental asset markets abstract this paper examines how traders confidence and market confidence affect outcomes in an experimental asset market with known fundamental values in this type of market prices usually present large deviations from the fundamental value in other words bubbles are known to occur we measure beliefs by asking participants to forecast the one period ahead price as a discrete probability mass distribution we define confidence as the inverse of the dispersion of beliefs for each trader and also create a market wide measure of this to measure agreement across traders we find that confidence affects price formation and is also important in explaining the dynamics and size of the bubble moreover as traders are successful they become increasingly certain of their beliefs even if these beliefs are on non fundamental values thus increasing the likelihood of price bubbles

trust but verify monitoring inspection costs and opportunism under limited observability abstract is feedback on trustworthiness necessary for the functioning of economic relationships in many real world economic environments such feedback can at best be acquired through costly monitoring raising questions of how trust and efficiency can be maintained in the lab we conduct a modified finite horizon binary trust game in which we vary the observability of the trustee s actions in the baseline condition trustors can perfectly observe their trustee s actions we compare this to a condition in which that actions are unobservable and three conditions in which they must be actively monitored at zero low or high cost respectively counter intuitively differences in observability do not lead to significant differences in trust and efficiency but the levels are supported by very different information structures while trustors monitored every action under zero observation costs most of trusting actions were blind trustors did not learn whether their trust was honored or not under costly monitoring even under complete unobservability almost half of the available surplus was realized there are distributive impacts however the gains from trust favor trustees under the more adverse informational conditions the behavioral patterns are consistent with the fact that trustors beliefs about their trustee s conduct are almost invariant across conditions

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

a profit based unit commitment ga for the competitive environment as the electrical industry restructures many of the traditional algorithms for controlling generating units need modification or replacement previously utilized to schedule generation units in a manner that minimizes costs while meeting all demand the unit commitment uc algorithm must be updated a uc algorithm that maximizes profit will play an essential role in developing successful bidding strategies for the competitive generator simply bidding to win contracts is insufficient bidding strategies must result in contracts that on average cover the total generation costs no longer guaranteed to be the only electricity supplier a generation company s share of the demand will be more difficult to predict than in the past removing the obligation to serve softens the demand constraint in this paper the authors provide a price profit based uc formulation which considers the softer demand constraint and allocates fixed and transitional costs to the scheduled hours the authors describe a genetic algorithm solution to this new uc problem and present results for an illustrative example

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

consumer inequality aversion and risk preferences in community supported agriculture abstract in community supported agriculture csa consumers face a tradeoff between i the desire to support a csa farmer and obtain environmentally friendly goods and ii the risk associated with a long term commitment we elicit inequality aversion and risk preferences of a sample of 162 french csa consumers using incentivized field experiments we find that csa consumers are concerned about payoff inequalities while we obtain evidence of advantageous inequality aversion toward csa farmers we also find disadvantageous inequality seeking we find that csa consumers are risk averse and loss averse and distort probabilities we also observe that inequality and risk preferences in the loss domain might complement each other to strengthen consumers support for csa farmers

diversification return portfolio rebalancing and the commodity return puzzle diversification return is an incremental return earned by a rebalanced portfolio of assets the author argues that the underlying source of the diversification return is the rebalancing in contrast the incremental return of a buy and hold portfolio is driven by the fact that the best performing assets become a greater fraction of the portfolio on the basis of these findings the author resolves two aspects of a puzzle associated with gorton and rouwenhorst s index of commodity futures

violations of cumulative prospect theory in mixed gambles with moderate probabilities in a classroom choice experiment with mixed gambles and moderate probabilities we find severe violations of cumulative prospect theory cpt and of markowitz stochastic dominance our results shed new light on the exchange between levy and levy 2002 and wakker 2003 in this journal

narrow bracketing and dominated choices an experiment by tversky and kahneman 1981 illustrates that people s tendency to evaluate risky decisions separately can lead them to choose combinations of choices that are first order stochastically dominated by other available combinations we investigate the generality of this effect both theoretically and experimentally we show that for any decisionmaker who does not have constant absolute risk averse preferences and who evaluates her decisions one by one there exists a simple pair of independent binary decisions where the decisionmaker will make a dominated combination of choices we also characterize as a function of a person s preferences the amount of money that she can lose due to a single mistake of this kind the theory is accompanied by both a real stakes laboratory experiment and a large sample survey from the general u s population replicating tversky and kahneman s original experiment where decisionmakers with prototypical prospect theory preferences will choose a dominated combination we find that 28 of the participants do so in the survey we ask the respondents about several hypothetical large stakes choices and find higher proportions of dominated choice combinations a statistical model that estimates preferences from the survey results is best fit by assuming people have utility functions that are close to prospect theory value functions and that about 83 of people bracket narrowly none of these results varies strongly with the personal characteristics of participants we also demonstrate directly that dominated choices are driven by narrow bracketing when we eliminate the possibility of narrow bracketing by using a combined presentation of the decisions the dominated choices are eliminated in the laboratory experiment and are greatly reduced in the survey

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

preferences inflation and welfare abstract this paper systematically examines how degrees of household risk aversion ra and elasticity of intertemporal substitution eis impact the welfare costs of inflation in a heterogeneous agent environment featuring capital and essential money empirical evidence suggests that households have degrees of ra and eis that differ on average from traditional values and display large amounts of dispersion capturing these empirical features of preference values in an otherwise standard model leads to welfare enhancements of inflation due to household substitution of money for capital the analysis also compares the welfare implications for alternative ways to implement monetary policy

incentives in experiments a theoretical analysis experimental economists currently lack a convention for how to pay subjects in experiments with multiple tasks we provide a theoretical framework for analyzing this question assuming statewise mo

ambiguity attitudes in a large representative sample using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample in addition to ambiguity aversion we confirm an ambiguity component recently found in laboratory studies a insensitivity the tendency to treat subjective likelihoods as 50 50 thus overweighting extreme events our ambiguity measurements are associated with real economic decisions specifically a insensitivity is negatively related to stock market participation ambiguity aversion is also negatively related to stock market participation but only for subjects who perceive stock returns as highly ambiguous this paper was accepted by james smith decision analysis

is stock price volatility increasing several different measures of stock price volatility over the period from march 1885 through october 20 1989 indicate that volatility has not increased substantially if one looks at the entire period and that volatility today is much less than it was in the 1930s this holds true whether one considers daily movements within a decade monthly movements within a decade or daily movements over the whole period daily market volatility in the 1980s has been greater than in any decade since 1950 however volatility was unusually low in the 1950s and 1960s furthermore the increase in daily volatility in the 1980s disappears when volatility is measured as month to month percentage changes our perception of volatility is a function of the benchmark used to make comparisons and the time period over which volatility is measured

capturing the risk premium of commodity futures the role of hedging pressure abstract we construct long short factor mimicking portfolios that capture the hedging pressure risk premium of commodity futures we consider single sorts based on the open interests of hedgers or speculators as well as double sorts based on both positions the long short hedging pressure portfolios are priced cross sectionally and present sharpe ratios that systematically exceed those of long only benchmarks further tests show that the hedging pressure risk premiums rise with the volatility of commodity futures markets and that the predictive power of hedging pressure over cross sectional commodity futures returns is different from the previously documented forecasting power of past returns and the slope of the term structure

decision making under risk in deal or no deal we analyse the choices of 399 contestants in the australian version of the television game show deal or no deal we calculate risk aversion bounds for each contestant revealing considerable heterogeneity we then estimate a structural stochastic choice model that captures the dynamic decision problem faced by contestants to address individual heterogeneity we nest the dynamic problem within the settings of both a random effects and a random coefficients probit model our structural model produces plausible estimates of risk aversion confirms the role of individual heterogeneity and suggests that a model of stochastic choice is indeed appropriate we find mixed evidence of greater risk aversion by females we also examine generalizations to expected utility theory finding that the rank dependent utility model adds non negligible explanatory power and indicates optimism in probability weighting finally we test but are unable to confirm the existence of an endowment effect for lotteries copyright 2009 john wiley sons ltd

inflation risk premia and the expectations hypothesis abstract we study the properties of the nominal and real risk premia of the term structure of interest rates we develop and solve the bond pricing implications of a structural monetary version of a real business cycle model with taxes and endogenous monetary policy we show the relation of this model with the class of essentially affine models that incorporate an endogenous state dependent market price of risk we characterize and estimate the inflation risk premium and find that over the last 40 years the ten year inflation risk premium has been has averaged 70 basis points it is time varying ranging from 20 to 140 basis points over the business cycle and its term structure is sharply upward sloping the inflation risk premium explains 23 42 of the time variation in the five ten year forward risk premium and it plays an important role in help explain deviations from the expectations hypothesis of interest rates

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

estimating individual discount rates in denmark a field experiment we estimate individual discount rates with respect to time streams of money using controlled laboratory experiments these discount rates are elicited by means of field experiments involving real monetary rewards the experiments were carried out across denmark using a representative sample of 268 people between 19 and 75 years of age individual discount rates are estimated for various households differentiated by socio demographic characteristics such as income and age our conclusions are that discount rates are constant over the 12 month to 3 year horizons used in these experiments and that discount rates vary substantially with respect to several socio demographic variables hence we conclude that it would be reasonable to assume constant discount rates for specific household types but not the same rates across all households

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

eliciting informative feedback the peer prediction method many recommendation and decision processes depend on eliciting evaluations of opportunities products and vendors a scoring system is devised that induces honest reporting of feedback each rater merely reports a signal and the system applies proper scoring rules to the implied posterior beliefs about another rater s report honest reporting proves to be a nash equilibrium the scoring schemes can be scaled to induce appropriate effort by raters and can be extended to handle sequential interaction and continuous signals we also address a number of practical implementation issues that arise in settings such as academic reviewing and online recommender and reputation systems

higher order risk attitudes demographics and financial decisions we conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance in a large demographically representative sample as well as in a sample of undergraduate students participants make pairwise choices between lotteries of the form proposed by eeckhoudt and schlesinger 2006 the choices in these lotteries isolate prudent from imprudent and temperate from intemperate behavior we relate individuals risk aversion prudence and temperance levels to demographics and financial decisions we observe that the majority of individuals decisions are consistent with risk aversion prudence and temperance in both the student and the demographically representative sample an individual s level of prudence is predictive of his wealth saving and borrowing behavior outside of the experiment while temperance predicts the riskiness of portfolio choices our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two

a unified approach to testing for serial correlation in stock returns this article provides a unified approach for testing serial correlation in stock returns the authors describe a general class of statistics that are linear combinations of consistent estimators of autocorrelations as special cases they show that this class captures many of the statistics studied in the recent finance and macroeconomics literature using this result the authors then provide a common perspective on the asymptotic distribution and power of these statistics copyright 1994 by university of chicago press

fuzzy self scheduling for gencos this letter presents a comprehensive fuzzy approach for maximizing a genco s profit in a competitive electricity market considering uncertainties the market uncertainties considered are the demand spinning and nonspinning reserves market prices and probability that reserves are called and generated the proposed technique produces an optimal profit fuzzy function that reflects the market uncertainties and helps for hedging risks

violence and risk preference experimental evidence from afghanistan comment in this comment on callen et al 2014 i revisit recent evidence uncovering a preference for certainty in violation of dominant normative and descriptive theories of decision making under risk i show that the empirical findings are potentially confounded by systematic noise i then develop choice lists that allow me to disentangle these different explanations experimental results obtained with these lists reject explanations based on a preference for certainty in favor of explanations based on random choice from a theoretical point of view the levels of risk aversion detected in the choice list involving certainty can be accounted for by prospect theory through reference dependence activated by salient outcomes

is roger federer more loss averse than serena williams using data from the high stakes 2013 dubai professional tennis tournament we find that compared with a tied score i male players have a higher serve speed and thus exhibit more effort when behind in score and their serve speeds get less sensitive to losses or gains when score difference gets too large and ii female players do not change their serve speed when behind while serving slower when ahead thus male players comply more with prospect theory exhibiting more loss aversion and reflection effect our results are robust to controlling for player fixed effects and characteristics with player random effects

optimal response of a thermal unit to an electricity spot market this paper addresses the optimal response of a thermal unit to an electricity spot market the objective is to maximize the unit profit from selling both energy and spinning reserve in the spot market the paper proposes a 0 1 mixed integer linear programming approach that allows a rigorous modeling of i nonconvex and nondifferentiable operating costs ii exponential start up costs iii available spinning reserve taking into account ramp rate restrictions and iv minimum up and down time constraints this approach overcomes the modeling limitations of dynamic programming approaches and is computationally efficient results from realistic case studies are reported