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Author: Hilda Kammoun
Publisher:
ISBN:
Category :
Languages : en
Pages : 255
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Book Description
This work elicits the utility functions of financial practitioners and measures their loss aversion coefficients under prospect theory (1992) using the parameter-free method of Abdellaoui et al. (2006). The measurements in the field corroborate the latter's measurements in the laboratory regarding the concavity of the utility function for gains and convexity for losses. However, although loss aversion exists in the aggregate, the median practitioner is found to be less loss averse than the median student. Conditions that characterize a real market experience but are difficult to realize in the artificial context of the laboratory may account for the behavioral difference. Among them are the schooling in the assessment of prospects, the volatility of the market and the Wall Street's compensation incentives. An important proviso is that the preferences of the students/practitioners analyzed following another method reflect consistent preferences. The qualitative investigation of the preferences of MBA students using the parameter-free method developed by Baucells and Heukamp (2006) supports the results of Abdellaoui et al.'s (2006) for students. A noteworthy result is the strong tendency to shift from loss aversion to gain seeking for the higher overall probability of gain or the higher probability of maximal gain combined with a limited extreme loss.
Author: Hilda Kammoun
Publisher:
ISBN:
Category :
Languages : en
Pages : 255
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Book Description
This work elicits the utility functions of financial practitioners and measures their loss aversion coefficients under prospect theory (1992) using the parameter-free method of Abdellaoui et al. (2006). The measurements in the field corroborate the latter's measurements in the laboratory regarding the concavity of the utility function for gains and convexity for losses. However, although loss aversion exists in the aggregate, the median practitioner is found to be less loss averse than the median student. Conditions that characterize a real market experience but are difficult to realize in the artificial context of the laboratory may account for the behavioral difference. Among them are the schooling in the assessment of prospects, the volatility of the market and the Wall Street's compensation incentives. An important proviso is that the preferences of the students/practitioners analyzed following another method reflect consistent preferences. The qualitative investigation of the preferences of MBA students using the parameter-free method developed by Baucells and Heukamp (2006) supports the results of Abdellaoui et al.'s (2006) for students. A noteworthy result is the strong tendency to shift from loss aversion to gain seeking for the higher overall probability of gain or the higher probability of maximal gain combined with a limited extreme loss.
Author: Mohammed Abdellaoui
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
A growing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.
Author: Mohammed Abdellaoui
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
We propose a simple, parameter-free method that, for the first time, makes it possible to completely observe Tversky and Kahneman's (1992) prospect theory. While methods existed to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby it can measure prospect theory's entire utility function. Consequently, we can properly identify properties of utility and perform new tests of prospect theory. We implemented our method in an experiment and obtained support for prospect theory. Utility was concave for gains and convex for losses and there was substantial loss aversion. Both utility and loss aversion were the same for risk and ambiguity, as assumed by prospect theory, and sign-comonotonic trade-off consistency, the central condition of prospect theory, held.
Author: Paul W. Glimcher
Publisher: Academic Press
ISBN: 0123914698
Category : Psychology
Languages : en
Pages : 606
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Book Description
In the years since it first published, Neuroeconomics: Decision Making and the Brain has become the standard reference and textbook in the burgeoning field of neuroeconomics. The second edition, a nearly complete revision of this landmark book, will set a new standard. This new edition features five sections designed to serve as both classroom-friendly introductions to each of the major subareas in neuroeconomics, and as advanced synopses of all that has been accomplished in the last two decades in this rapidly expanding academic discipline. The first of these sections provides useful introductions to the disciplines of microeconomics, the psychology of judgment and decision, computational neuroscience, and anthropology for scholars and students seeking interdisciplinary breadth. The second section provides an overview of how human and animal preferences are represented in the mammalian nervous systems. Chapters on risk, time preferences, social preferences, emotion, pharmacology, and common neural currencies—each written by leading experts—lay out the foundations of neuroeconomic thought. The third section contains both overview and in-depth chapters on the fundamentals of reinforcement learning, value learning, and value representation. The fourth section, “The Neural Mechanisms for Choice, integrates what is known about the decision-making architecture into state-of-the-art models of how we make choices. The final section embeds these mechanisms in a larger social context, showing how these mechanisms function during social decision-making in both humans and animals. The book provides a historically rich exposition in each of its chapters and emphasizes both the accomplishments and the controversies in the field. A clear explanatory style and a single expository voice characterize all chapters, making core issues in economics, psychology, and neuroscience accessible to scholars from all disciplines. The volume is essential reading for anyone interested in neuroeconomics in particular or decision making in general. Editors and contributing authors are among the acknowledged experts and founders in the field, making this the authoritative reference for neuroeconomics Suitable as an advanced undergraduate or graduate textbook as well as a thorough reference for active researchers Introductory chapters on economics, psychology, neuroscience, and anthropology provide students and scholars from any discipline with the keys to understanding this interdisciplinary field Detailed chapters on subjects that include reinforcement learning, risk, inter-temporal choice, drift-diffusion models, game theory, and prospect theory make this an invaluable reference Published in association with the Society for Neuroeconomics—www.neuroeconomics.org Full-color presentation throughout with numerous carefully selected illustrations to highlight key concepts
Author: R. Duncan Luce
Publisher: Psychology Press
ISBN: 1135662703
Category : Psychology
Languages : en
Pages : 371
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Book Description
This new monograph presents Dr. Luce's current understanding of the behavioral properties people exhibit (or should exhibit) when they make selections among alternatives and how these properties lead to numerical representations of those preferences. It summarizes, and places in historical perspective, the research Dr. Luce has done on utility theory for over 10 years. Included are axiomatic theoretical formulations, experiments designed to test individual assumptions, and analyses of the fit to bodies of data of numerical representations derived from the theory.
Author: Peter P. Wakker
Publisher: Cambridge University Press
ISBN: 1139489100
Category : Business & Economics
Languages : en
Pages : 519
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Book Description
Prospect Theory: For Risk and Ambiguity, provides a comprehensive and accessible textbook treatment of the way decisions are made both when we have the statistical probabilities associated with uncertain future events (risk) and when we lack them (ambiguity). The book presents models, primarily prospect theory, that are both tractable and psychologically realistic. A method of presentation is chosen that makes the empirical meaning of each theoretical model completely transparent. Prospect theory has many applications in a wide variety of disciplines. The material in the book has been carefully organized to allow readers to select pathways through the book relevant to their own interests. With numerous exercises and worked examples, the book is ideally suited to the needs of students taking courses in decision theory in economics, mathematics, finance, psychology, management science, health, computer science, Bayesian statistics, and engineering.
Author: Ali al-Nowaihi
Publisher:
ISBN:
Category :
Languages : en
Pages : 7
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Book Description
We show that preference-homogeneity and loss-aversion are necessary and sufficient for the value function to have the power form with identical powers for gains and losses and for the probability weighting functions for gains and losses to be identical.
Author: Daniel Friedman
Publisher: Routledge
ISBN: 1317821238
Category : Business & Economics
Languages : en
Pages : 171
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Book Description
For several decades, the orthodox economics approach to understanding choice under risk has been to assume that each individual person maximizes some sort of personal utility function defined over purchasing power. This new volume contests that even the best wisdom from the orthodox theory has not yet been able to do better than supposedly naïve models that use rules of thumb, or that focus on the consumption possibilities and economic constraints facing the individual. The authors assert this by first revisiting the origins of orthodox theory. They then recount decades of failed attempts to obtain meaningful empirical validation or calibration of the theory. Estimated shapes and parameters of the "curves" have varied erratically from domain to domain (e.g., individual choice versus aggregate behavior), from context to context, from one elicitation mechanism to another, and even from the same individual at different time periods, sometimes just minutes apart. This book proposes the return to a simpler sort of scientific theory of risky choice, one that focuses not upon unobservable curves but rather upon the potentially observable opportunities and constraints facing decision makers. It argues that such an opportunities-based model offers superior possibilities for scientific advancement. At the very least, linear utility – in the presence of constraints - is a useful bar for the "curved" alternatives to clear.
Author: Daniel Kahneman
Publisher:
ISBN:
Category : Utility theory
Languages : en
Pages : 27
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Book Description
Author: Karl Vind
Publisher: Springer Science & Business Media
ISBN: 3540247572
Category : Business & Economics
Languages : en
Pages : 276
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Book Description
Volume 14 in the Studies in Economic Theory series deals with the important economic problem of uncertainty. It contains all the classical results, but also new results that give a solution to how uncertainty can be formalized.
