modifying the mean variance approach to avoid violations of stochastic dominance the mean variance approach is an influential theory of decision under risk proposed by markowitz markowitz h 1952 portfolio selection j finance7 1 77 91 the mean variance approach implies violations of first order stochastic dominance not commonly observed in the data this paper proposes a new model in the spirit of the classical mean variance approach without violations of stochastic dominance the proposed model represents preferences by a functional u l r l where u l denotes the expected utility of lottery l 1 1 is a subjective constant and r l is the mean absolute utility semideviation of lottery l the model comprises a linear trade off between expected utility and utility dispersion the model can accommodate several behavioral regularities such as the allais paradox and switching behavior in samuelson s example

rational heuristics expectations and behaviors in evolving economies with heterogeneous interacting agents we analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent based model populated by heterogeneous interacting firms agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change imperfect information coordination hurdles and structural breaks in these circumstances we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naive learning rules our results suggest that fast and frugal robust heuristics may not be a second best option but rather rational responses in complex and changing macroeconomic environments jel c63 d8 e32 e6 o4

the possibility of informationally efficient markets abstract a rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price contrary to a wide held conjecture whereas a continuum of investors is inconsistent with fully revealing equilibrium finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal return model more information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off under fully revealing price information market equilibria both with and without information acquisition are pareto efficient

public prioritisation of energy affordability in the uk much research has focused on the so called energy trilemma i e three leading energy policy issues energy security affordability and climate change mitigation whilst substantial understanding exists of why people support climate friendly energy policies little is known about why they think affordability is important particularly what leads members of the public to identify this policy goal as more important than other objectives here we examine this question via a nationally representative survey of 2441 uk residents and demonstrate that concerns about personal costs explain a small amount of variation in the prioritisation of affordability as an energy policy goal a range of other factors also significantly contribute one such factor is beliefs about who is responsible for energy transitions these findings suggest policy actions to address affordability concerns should go beyond energy prices and include additional considerations such as distributive justice and equality

public values for energy futures framing indeterminacy and policy making in the uk there are strong policy imperatives to transition toward low carbon energy systems but how and in what ways such transitional processes might be realised remains highly uncertain one key area of uncertainty pertains to public attitudes and acceptability though there is wide ranging research relevant to public acceptability very little work has unpacked the multiple questions concerning how policy makers can grapple with and mitigate related uncertainties in efforts to enact energy systems change in this paper public acceptability is identified as an indeterminate form of uncertainty that presents particular challenges for policy making we build on our existing research into public values for energy system change to explore how the outcomes of the project can be applied in thinking through the uncertainties associated with public acceptability notably we illustrate how the public values identified through our research bring into view alternative and quite different problem and solution framings to those currently evident within uk policy we argue that engagement with a wide range of different framings can offer a basis for better understanding and anticipating public responses to energy system change ultimately aiding in managing the complex set of uncertainties associated with public acceptability

a class of monotone economies in which rational expectations equilibria exist but prices do not reveal all information abstract some economies having excess demands which depend monotonically on agents information signals are examined if there are no multiple market clearing prices then these economies have strict rational expectations equilibria in which equilibrium prices alone do not transmit all information

risk attitude under two alternative theories of choice under risk abstract anticipated utility theory and prospect theory have been proposed as descriptive models of choice under uncertainty this paper examines the concept of risk attitude under these two theories and considers the relationship between risk attitude under von neumann morgenstern expected utility theory and risk attitude under these alternative theories a risk premium analysis is conducted and risk premia are partitioned to characterize the complex nature of risk attitude under these theories comparative risk aversion across individuals is also considered

value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards abstract we present an algorithm for approximating the solution to discrete time stochastic dynamic programs with inequality constraints the algorithm exploits the state preference approach to choice under uncertainty to reduce the dimensionality of the state space and polynomial approximation to improve computational efficiency it is particularly useful in financial applications involving liquidity and credit constraints and more than one asset the algorithm provides information about the derivatives of the value function and therefore risk aversion along with asset demands

rational expectations in microeconomic models an overview abstract this paper is an expository introduction to several topics of current research in the general equilibrium theory of rational expectations more specifically we discuss the existence of exact and approximate rational expectations equilibria the implementation of equilibria the behavior of learning and smoothing processes by which traders construct expectations from repeated observations of the market and the lagged use of the information revealed by prices in an intertemporal sequence of markets the purpose of this discussion is to introduce papers on these topics appearing in the journal of economic theory symposium on rational expectations in microeconomic models

rational behavior and economic theory abstract nowadays it seems almost universally presumed that the fundamental characteristic of homo oeconomicus is his rationality we analyze the role played by the concept of rationality in economic theory and demonstrate that it is necessarily constrained to be an essentially contentless notion we show that the main body of economic theory is firmly grounded and that some contrasting approaches to rationality although leading to heated debates and vivid confusion have no fundamental significance for economics with a refereshed view on the essence of economics we argue that the principles of economic theory form an essential methodological guide for the emergent line of research based on the use of so called evolutive models

price inference in small markets this paper investigates the effects of market size on the ability of price to aggregate traders private information to account for heterogeneity in correlation of trader values a gaussian model of double auction is introduced that departs from the standard information structure based on a common fundamental shock the paper shows that markets are informationally efficient only if correlations of values coincide across all bidder pairs as a result with heterogeneously interdependent values price informativeness may not increase monotonically with market size as a necessary and sufficient condition for the monotonicity price informativeness increases with the number of traders if the implied reduction in the absolute value of an average correlation statistic of an information structure is sufficiently small

uptake and usage of cost reflective electricity pricing insights from psychology and behavioural economics abstract the australian electricity industry like many other countries globally is currently facing the complex challenge of reforming electricity tariffs momentum is growing for transitioning residential consumers toward more cost reflective pricing that better reflects the true costs of generation and supply and sends a price signal that presumably incentivises reduced consumption during peak periods under such tariffs customers pay more for electricity used during times of peak demand unlike traditional flat rate tariffs where the price remains stable regardless of time or demand pilot trials indicate that cost reflective tariffs might succeed in reducing peak demand but often only for a small minority of customers such that population wide demand response is minimal or insignificant in this paper we apply insights from psychology and behavioural economics to identify how cost reflective pricing can be designed depicted and delivered to enhance customer uptake and optimal usage thereby facilitating appropriate demand response for a larger cross section of the population by carefully considering the likely impact of relevant cognitive biases and psychological factors which routinely shape human decision making and behaviour we are able to propose practical strategies that industry can adopt to maximise the prospect of cost reflective pricing achieving significant population level peak demand reductions while providing shared benefits for customers retailers networks and regulators alike

on the statistical foundations of non linear utility theory the case of status quo dependent preferences abstract an account of non expected utility is given which resumes concepts of analysis from statistical decision theory and combines them with standard principles of preference theory such as weak order continuity and stochastic dominance a three parameter family of probability dependent utility functions is specified which is governed by the decision maker s aspiration level distribution of present wealth or status quo and discount parameter for future risks the approach offers a simple resolution of the allais paradox and explains basic patterns of probability dependent risk attitudes arising in theoretical and applied decision analysis

rational expectations equilibrium an alternative approach we study a dynamic market process in which traders condition their beliefs about payoff relevant parameters on past endogenously generated market data and current exogenous data we say that a market process is informative if the beliefs of traders who receive only endogenously generated market data converge almost surely to the true parameter value our main result is that under standard regularity hypotheses the generic market process is informative we define an equilibrium as the limit points of the market process journal of economic literature classification numbers 02 1 026 c 1984 academic press inc

rational risk valuation given sequential reduction opportunities abstract we design experimental auctions with sequential risk reduction opportunities between private and collective self protection or self insurance we reject two hypotheses of rational risk valuation individuals do not prefer self protection to self insurance and the sequencing of private and collective mechanisms matters

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

risk risk versus standard gamble procedures for measuring health state utilities contingent valuation cv has been widely used to measure the potential benefits derived from different policy decisions however doubt now exists about the validity of the cv method and alternative approaches to benefit valuation have been proposed the paper reports on the results of a study which was designed to test the viability of two of the most prominent of the alternatives the risk risk rr and standard gamble sg approaches if individual preferences are consistent with the axioms of von neumann morgenstern expected utility theory eut then the two methods should generate the same interval scales for any given set of health states however the results show that sg utilities are substantially higher than rr ones thus casting doubt on these axioms the paper discusses alternatives to eut which might better expalin the discrepancies found it also considers whether the results might be explained in terms of status quo bias and or by the relative difficulty of rr questions the results presen

precautionary saving and risk aversion an anticipated utility approach abstract yaari 1987 proved that within the anticipated utility framework a risk averse decision maker will have precautionary saving regardless of the sign of the third derivative of his utility function in this note we extend a modification of this result for an n period model

inefficient dynamic portfolio strategies or how to throw away a million dollars in the stock market a number of portfolio strategies followed by practitioners are dominated because they are incompletely diversified over time the payoff distribution pricing model is used to compute the cost of following undiversified strategies simple numerical examples illustrate the technique and computer generated examples provide realistic estimates of the cost of some typical policies using reasonable parameter values the cost can be substantial and should not be ignored by practitioners a section on generalizations shows how to extend the analysis to term structure models and other general models of returns this abstract was borrowed from another version of this item

foundations of decision analysis along the way this paper offers a personal perspective on the development of decision theory and related subjects during the past half century it first reviews six milestones in the foundations of decision analysis that are associated with frank p ramsey john von neumann and oskar morgenstern leonard j savage maurice allais and ward edwards west churchman and russell ackoff and kenneth arrow it then gives a personal account of further developments over the past 30 years in linear utility theory subjective probability and ambiguity nonlinear preference and utility stochastic dominance and inequality analysis multiattribute utility theory and the theory of social choice the paper could be viewed as a supplement to my extensive review of utility theory in management science some 20 years ago however it makes no claim of completeness since its main aim is to recall important debts and describe what it has been like to be a part of the development of decision analysis in the past few decades

the comparative statics on asset prices based on bull and bear market measure abstract for single period complete financial asset markets with representative investors we introduce a bull market measure for uncertain state occurrence and its associated ordering between representative investors in markets based on their marginal rate of substitution between equilibrium consumption allocations among possible states these concepts combine and generalize the likelihood ratio dominance relation between probability prospects of state occurrence and the arrow pratt ordering of risk aversion in expected utility settings by analyzing the comparative statics for bull market effects on equilibrium asset prices we derive some monotone properties of the risk free rate and discounted prices of dividend monotone assets

many good choice axioms when can many good lotteries be treated as money lotteries abstract without the independence axiom a weaker substitution axiom adi is necessary for the preferences over money lotteries induced by the money metric utility function to be well behaved given adi the agent s preferences over many good lotteries can be reconstructed from knowledge of preferences over money lotteries and over sure multivariate outcomes moreover other substitution properties of underlying many good lottery preferences are inherited by the money lottery preferences we analyze the formal and intuitive nature of adi and conclude that analysis of choice under uncertainty without adi cannot be one dimensional

making book against oneself the independence axiom and nonlinear utility theory an individual with known preferences over lotteries can be led to accept random wealth distributions different from his initial endowment by a sequential process in which some uncertainty is resolved and he is offered a new lottery in place of the remaining uncertainty this paper examines the restrictions that can be placed on an individual s preferences by axioms that stipulate that such a process not be able to generate a new wealth distribution that is prima facie inferior to the original the relationship of these axioms to the independence axiom of von neumann and morgenstern and to the quasi convexity of preferences in the wealth distribution are explored

alternative models of choice under uncertainty and demand for health insurance the authors test a standard expected utility model and alternative models about how people evaluate risky prospects using data about individuals preferences among health insurance plans a model that assumes people evaluate gains and losses relative to a reference rather than final outcomes treat gains and losses asymmetrically and process certain and uncertain outcomes separately provides a better fit than the standard utility model these findings suggest inertia in health insurance plan choice and that individuals are more responsive to decreases than to increases in the price of insurance copyright 1996 by mit press

empirical tests for stochastic dominance efficiency we derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets the tests can be computed using straightforward linear programming bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation using our tests the fama and french market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book to market equity ratio

information and strategic behavior abstract does encouraging trader participation enhance market competitiveness this paper shows that when trader preferences are interdependent trader market power does not necessarily decrease with greater participation and traders need not become price takers in large markets thus larger markets can be less liquid and associated with lower ex ante welfare in the linear normal model the necessary and sufficient condition on the information structure is provided under which price impact is monotone in market size a condition is given when the rational expectations equilibrium which is typically not fully revealing within the considered class of preference interdependencies is obtained in large markets

risk conservatism and the circumstances of utility theory expected utility theory is both positive and normative it claims on the one hand to describe and predict decisions individuals actually make under uncertainty its validity as a positive theory rests on empirical evidence as a normative doctrine on the other hand utility theory is prescriptive it is supposed to guide decision makers helping them figure out what to choose and why the status of its prescriptive claims rests on the appeal of the axioms that generate or define the theory empirical investigations into utility theory have established widespread and systematic tendencies among people to disobey the axioms of utility theory as fishburn points out theories of rational preference and choice in situations under uncertainty have come under increasing fire because of their inability to model certain types of reasonable and persistent patterns of preference 1 p 1 the problem is that the presence of such systematic reasonable patterns of preference casts doubt on the appeal of the axioms and thus on utility theory s normative status one cannot easily defend a prescriptive theory whose implications are widely and systematically rejected this tension has recently led a number of decision theorists to try to modify or develop alternatives to utility theory they have introduced new concepts such as expected regret into the theory to explain rational choice under uncertainty and they have proposed giving up one or another of the traditional axioms their aim is to modify the theory in order to create a better fit between norms or prescriptions and empirical observations our strategy in this paper is different we offer a counter example but our purpose is not to show some fault with the axioms of utility theory in many circumstances we find the standard theory is elegant and predictive of choice we offer the counter example to help identify circumstances when at least one of the axioms of utility theory seems to lack appeal rather than adjust the theory in an attempt to preserve its universal applicability we will argue that the standard theory is often a good one but not for all situations under certain circumstances therefore we must look for alternatives to expected utility maximization as the normative principle of choice risk benefit analysis rests to a large extent on the foundation of expected utility maximization characterizing circumstances in which utility theory has greater or lesser appeal provides a perspective on some recent controversies in resource economics for example the perspective helps explain why the application of risk benefit analysis is particularly troublesome to problems of long term latent toxic chemicals of species extinction or of resource depletion the problem and our strategy for resolving it have parallels in moral and political philosophy moral theory is also an attempt to defend prescriptive principles which can guide and evaluate human actions the theory of right action like the theory of rational choice is derived from intuitive first principles not public opinion polls but moral theories must also be revised or qualified when they prescribe actions that are widely rejected rawls refers to this delicate process of revising both theory and intuitions to create a better fit as reaching a point of reflective equilibrium that is the strategy of decision theorists like machina bell loomis and sugden and fishburn who want to revise the axioms of utility theory but rawls and other philosophers apply ansession sponsored jointly with the association of environmental and resource economists

pricing efficiency and information use in risky markets information has economic value if it helps estimate the value of something both individuals and society at large are interested in the extent to which information about an object s value is contained in its market price apart from distributional issues society s interest is that price guide resource allocation so as to maximize value weighted production prices that would induce such efficient resource use are themselves efficient the purpose of the present paper is to distinguish various notions of an efficient price and to discuss problems in the assessment and achievement of pricing efficiency emphasis is placed on the information content and time domain of prices

the existence of fully rational expectations approximate equilibria with noisy price observations abstract nonrevealing fully rational expectations approximate equilibria exist in microeconomic pure exchange economies in which uninformed agents have suitably dispersed noisy price observations such traders maximize a state dependent expected utility conditional on the price vector they observe the distributions of noisy price observations and the correct equilibrium relationship between states of the world and prices in equilibrium aggregate excess demand is small with high probability in every state of the world and its expectation is also small this magnitude diminishes as the noisy price observations become more accurate equilibria are obtained by applying a fixed point argument to state dependent excess demand functions which are smooth because of the noisy price observations

pests and pesticides risk and risk aversion abstract theoretical and applied literature on risk in decision making for agricultural pest control is reviewed risk can affect pesticide decision making either because of risk aversion or because of its influence on expected profit it is concluded that risk does not necessarily lead to increased pesticide use by individual farmers uncertainty about some variables such as pest density and pest mortality does lead to higher optimal pesticide use under risk aversion however uncertainty about other important variables such as output price and yield leads to lower optimal levels of pesticide use neglect of these variables in most studies has led to the false assumption that pesticides are always risk reducing inputs furthermore there is evidence that in general the pesticide dosage which maximises expected profit is lower under risk than under certainty depending on the balance of forces to increase and decrease pesticide use under risk in many circumstances the net effect of risk on optimal decision making for pest control may be minimal the effect on risk of information about pest density and other variables as in integrated pest management programmes is discussed evidence on this issue is mixed a range of analytical techniques for analysing risk in pest control is reviewed throughout the paper gaps in the existing literature are identified

informational efficiency and information subsets this paper proposes a new definition of the efficient markets hypothesis with respect to information which is more formal and precise than those of rubinstein 13 fama 4 jensen 6 and beaver 1 and which fits well as a framework for interpreting the many tests of the efficient markets hypothesis in the literature security markets are here considered efficient with respect to information set if and only if revealing to all agents would change neither equilibrium prices nor portfolios in addition to other desirable features this definition has the subset property efficiency with respect to implies efficiency with respect to any subset of

the becker degroot marschak mechanism is not necessarily incentive compatible even for non random goods abstract this paper uses results from karni e safra z 1987 preference reversals and the observability of preferences by experimental methods econometrica 55 675 685 and karni e 1989 generalized expected utility analysis of multivariate risk aversion international economic review 30 297 305 to show that the becker degroot marschak mechanism is not always incentive compatible even when the item to be valued involves no uncertainty contrary to several recent assertions

food scares in an uncertain world we develop a model that explains the stylized facts of food scares an immediate and sharp decline in consumption of the product followed by a slow and frequently partial recovery of demand after the scare passes the model is used in conjunction with the natural experiment afforded by the mad cow crisis to elicit empirical information on decision makers perception of uncertainty our theoretical and quantitative results suggest that observed behavior is consistent with sharp changes in beliefs and the presence of knightian uncertainty as measured by the degree of imprecision in our model

the relationship between daily u s and japanese equity prices evidence from spot versus futures markets abstract the daily and overnight transmission of equity prices between the u s and japan is examined in this paper this study documents that the use of the opening value of an equity index to represent equity prices at the open is unlikely to be reliable and the calculated opening values of the nikkei 225 and especially the s p500 indexes mostly reflect prior days closing prices unlike prior studies this paper accounts for this problem of non synchronous trading at the open and finds that u s equity prices do not lead japanese equity prices as both u s and japanese opening equity prices reflect overnight price changes in the other market

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

insider trading in a rational expectations economy it is often argued that efficiency considerations require society to freely permit insider trading in this article an opposing efficiency argument is formalized the model incorporates an investment stage followed by a trading stage if outsiders expect insiders to take advantage of them in trading outsiders will reduce their investment the insiders loss from this diminished investor confidence may more than offset their trading gains consequently a prohibition on insider trading may effect a pareto improvement insiders are made better off if they can precommit not to trade on their privileged information govemment regulation accomplishes exactly this jel 022 026 313 the traditional rationale articulated for insider trading regulation and other securities law is that such rules promote confidence in markets indeed president franklin d roosevelt justified the first major u s securities legislation by saying it should give impetus to honest dealing in securities and thereby bring back public confidence similar language is still invoked half a century later in connection with enforcement efforts against insider trading and in proposals for tightened stock

prudence in bargaining the effect of uncertainty on bargaining outcomes abstract we investigate the outcome of bargaining when a player s pay off from agreement is risky we find that a risk averse player typically increases his equilibrium receipts when his pay off is made risky this is because the presence of risk makes individuals behave more patiently in bargaining strong analogies are drawn to the precautionary saving literature we show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk averse player may be better off receiving a risky pay off than a certain pay off

the invention of the independence condition for preferences this paper discusses the history and interrelations of three central ideas in preference theory the independence condition in decision under risk the sure thing principle in decision under uncertainty and conjoint independence for multiattribute decisions and consumer theory independence was recognized as an important component of decision under risk in the late 1940s by jacob marschak john nash herman rubin and norman dalkey and first appeared in publication in marschak marschak j 1950 rational behavior uncertain prospects and measurable utility econometrica18 111 141 and nash nash j f 1950 the bargaining problem econometrica18 155 162 the sure thing principle can be credited to savage savage l j 1953 une axiomatisation du comportement raisonnable face i l incertitude colloq internal centre national rech sci 40 econometrie 29 40 savage l j 1954 the foundations of statistics wiley new york 2nd edn dover new york 1972 conjoint independence for consumer theory was introduced by sono sono m 1943 the effect of price changes on the demand and supply of separable goods in japanese kokumin keisai zasshi74 1 51 and leontief leontief w w 1947a a note on the interrelation of subsets of independent variables of a continuous function with continuous first derivatives bull amer math soc 53 343 350 leontief w w 1947b introduction to a theory of the internal structure of functional relationships econometrica51 361 373 a form of it can also be recognized in samuelson samuelson p a 1947 foundations of economic analysis harvard university press cambridge ma presented earlier in samuelson samuelson p a 1940 foundations of analytical economics the observational significance of economic theory ph d dissertation harvard university boston ma independence and the sure thing principle are equivalent for decision under risk but in a less elementary way than has sometimes been thought the sure thing principle for decision under uncertainty and conjoint independence are identical in a mathematical sense the mathematics underlying our three preference conditions has an older history the independence condition for decision under risk can be recognized in the characterization of associative means and conjoint independence for multiattribute decisions in solutions to the generalized associativity functional equation

valuing amenity resources under uncertainty a skeptical view of recent resolutions abstract this paper questions colby and cory s recent characterization 1987 1988 1989 of the appropriate benefit measures to be used to value improvements in the quantity quality or conditions of access to environmental resources under uncertainty the paper uses graham s 1981 analysis of individual and aggregate welfare measurement under uncertainty to demonstrate the problems with colby and cory s recommendations it evaluates their classification of important research issues and summarizes in general terms the difficulties that arise in the practical implementation of the conceptual measures for benefits under uncertainty

sustainable development differing perspectives of ecologists and economists and relevance to ldcs abstract the claim is now widely that it is desirable to aim for a sustainable society for sustainable economic development and for sustainable productive systems this reflects the outlook of ecologists rather than the majority of economists although a small group of economists does see particular virtue in sustainability the outlook of ecologists is illustrated by conway s criteria for assessing the desirability of agricultural systems this approach is shown to involve several unresolved conceptual issues this leads to a discussion of the policy of a safe minimum standard as proposed by some economists and the critique of expected utility and risk benefit analysis by page and maclean and whether this might provide a bridge between the views of economists and ecologists a basis is established for considering whether sustainability of productive systems is likely to be a more important goal in less developed countries than in developed countries further examples of the stress of ecologists on the production sustainability goal are given and additional policy prescriptions for instance involving nomadism and transhumance are discussed

the market for sweepstakes this paper studies the market for monopolistically supplied sweepstakes we derive equilibrium demands for fixed prize and variable prize sweepstakes and determine the profit maximizing prize level and pay out ratio respectively it can be profitable to offer each type of sweepstake when there is a large enough number of weighted utility consumers who have constant absolute risk attitudes are strictly averse to small as well as symmetric risks and display longshot preference behaviour moreover for the variable prize sweepstake the supplier will generally find it profitable to combine sweepstakes targeting two smaller populations and offer a single sweepstake to the combined population this implication is corroborated by the recent spate of mergers of smaller state lotteries into larger ones

do prices transmit rationally expected information a simple model with asymmetric information in which inventory holders or traders submit demand curves to an auctioneer has a unique partially revealing equilibrium we wonder whether the agents can plausibly coordinate on this equilibrium through eductive reasoning relying on common knowledge the analysis stresses the role of two effects sensitivity and amplification whose product should be small enough the property is obtained whenever the equilibrium excess demand is steep enough i e when the search for information does not distort demand too much neither the influence of the number of informed agents nor that of noise trading are monotonic real time learning has strikingly different features jel d82 d84

nonlinear preferences and two stage lotteries theories and evidence nonlinear preferences models are theories for choice under risk which have weakened in one way or another the independence axiom of expected utility in this paper we present an experiment designed to discriminate between some basic ideas in this literature we tested the betweenness axiom a weaker form of independence against an alternative which predicts that indifference curves in the probabilities simplex are convex along the lower edge and concave along the hypotenuse we also checked whether preferences among single stage lotteries as those revealed by our test of betweenness should be extended to preferences among two stage lottery via the classical reduction of compound lottery axiom or via the certainty equivalent mechanism copyright 1994 by royal economic society

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

market efficiency and natural selection in a commodity futures market while the literature usually justifies informational efficiency in the context of rationality this article shows informational efficiency by applying the evolutionary idea of natural selection in a dynamic futures market speculators are assumed to merely act upon their predetermined trading types buyer or seller their predetermined fractions of wealth allocated for speculation and their inherent abilities to predict the spot price reflected in their distributions of prediction errors with respect to the spot price this article shows that the proportion of time that the futures price equals the spot price converges to one with probability 1 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

testing risklove in an experimental racetrack abstract this paper tests the asch quandt betting hypothesis which accounts for the ubiquitous underbetting overbetting favourite longshot phenomenon found at most racetracks by postulating that horserace wagering is a consumption activity an experimental racetrack was designed with only off track betting permissible thereby eliminating much or all of the consumption involved but the basic anomaly remained and in a somewhat stronger form it is hypothesized that the observed betting behaviour of our subjects is consistent with prospect theory and its two outcome equivalent rank dependent expected utility theory

effects of insider trading disclosures on speculative activity and future prices this paper explores a simple model of the effects of requiring a public disclosure of insider trader activity in future markets

stochastic dominance analysis without the independence axiom we characterize the consistency of a large class of nonexpected utility preferences including mean variance preferences and prospect theory preferences with stochastic orders for example stochastic dominances of different degrees our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker s preferences as an illustration we consider in some detail prospect theory and choice acclimating preferences two popular models of reference dependence under risk and we show the incompatibility of loss aversion with prudence this paper was accepted by james smith decision analysis

intrinsic preference for information abstract suppose agents value information not only to make contingent plans but also intrinsically how are such attitudes toward information related to attitudes toward risk we generalize the kreps porteus recursive expected utility model dropping both recursivity and expected utility there is a geometric analogy between risk and information we characterize intrinsic information loving in general by a substitution property analogous to multivariate risk loving and for smooth preferences by the convexity of gateaux derivatives even with recursivity preference for information does not imply expected utility we provide an example we examine connections between information loving and risk aversion for early and late resolving risks journal of economic literatureclassification numbers d80 d81

the role of values in public beliefs and attitudes towards commercial wind energy mandates for renewable energy lead to siting disputes because meeting the mandates requires the development of renewable energy production facilities proposals for one common form of renewable energy commercial wind farms are frequently met with forceful local opposition dissatisfied with simplistic explanations for this opposition i e nimby social scientists have urged a more nuanced understanding of public attitudes towards wind energy and other renewables based on a survey of residents of coastal michigan this article explores the role of general values and beliefs in shaping attitudes towards the potential development of commercial wind energy projects in or near respondents communities structural equation modeling reveals that support of commercial wind energy depends largely on a belief that wind farms will provide economic benefits to the community underlying values have substantial and important indirect effects on beliefs regarding the likely economic outcomes of wind farm development altruistic values buoy wind energy attitudes while values of traditionalism diminish wind energy support the pivotal role of values in attitudes towards renewables lends support for more participatory development processes

insurance design in the presence of safety nets abstract safety net assistance and insurance exist to manage risk and improve welfare this shared goal may lead to crowding out in a new approach this paper analyzes the interaction of assistance with two dimensions of insurance design level of coverage and types of risks covered in a society of risk averse vulnerable individuals and risk neutral assistance providers pareto improvements in welfare are achieved through incompleteness in the types of risks covered the results imply that safety nets promote demand for and the emergence of incomplete insurance these results have a wide application to insurance markets where safety nets are available including health care disaster aid and social welfare

partially revealing rational expectations equilibrium in a competitive economy abstract a class of pure exchange economies is considered in which some agents are informed of private information and others are uninformed existence of a partially revealing rational expectations equilibrium ree is proved without restricting attention to particular functional forms for utility functions and probability distributions without introducing noise into the model and without departing from the standard definition of ree the equilibrium is robust in the sense that if the primitives of the economy are slightly perturbed the economy continues to have a qualitatively similar ree with somewhat stronger assumptions placed on the economy the equilibrium is also the unique measurable ree

how projected electricity price and personal values influence support for a 50 renewable energy target in australia abstract this study investigated how projected electricity prices and personal values influence public support for a 50 renewable energy target ret in australia in an online experiment 404 participants rated their support for a 50 ret across eight projected increases in their quarterly power bills multi level modelling indicated that 1 support for the 50 ret fell as the projected price of electricity increased 2 although participants with low self enhancement values and high self transcendent values were most supportive of the 50 ret these value based differences disappeared as projected electricity prices increased implications of these findings for energy policy design are discussed

capabilities as menus a non welfarist basis for qaly evaluation quality adjusted life years qalys are the most widely used measure of health in economic evaluations of health care within a welfarist framework qalys are consistent with people s preferences under stringent assumptions several authors have argued that qalys are a valid measure of health within an extra welfarist framework this paper studies the applicability of qalys within the best known extra welfarist framework sen s capability approach we propose a procedure to value capability sets and provide a foundation for qalys within sen s capability approach we show that under appropriate conditions the ranking of capabilities can be represented locally by a qaly measure and that a willingness to pay for qalys can be defined the validity of qalys as a general measure of health requires the same stringent conditions as in a welfarist framework