Are Risk-Averse Agents more Optimistic? A Bayesian Estimation Approach.

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance. Its estimation leads to a non-trivial statistical problem. We start from a large lottery survey (1536 individuals). We assume that individuals have true unobservable characteristics. We adopt a Bayesian approach and use a hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We find that individuals are on average pessimistic and that pessimism and risk tolerance are positively correlated.Bayesian Estimation; MCMC Scheme; Importance Sampling; Pessimism; Risk Tolerance; Risk Aversion; Consensus Belief;

Are Risk Averse Agents More Optimistic? A Bayesian Estimation Approach

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance. This quantity is of particular importance since it characterizes the consensus belief in risk-taking situations with heterogeneous beliefs. Its estimation leads to a nontrivial statistical problem. We start from a large lottery survey (1,536 individuals). We assume that individuals have true unobservable characteristics and that their answers in the survey are noisy realizations of these characteristics. We adopt a Bayesian approach for the statistical analysis of this problem and use an hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We obtain that individuals are on average pessimistic and that pessimism and risk tolerance are positively correlated. As a consequence, we conclude that the consensus belief is biased towards pessimism.Bayesian estimation, MCMC scheme, importance sampling, pessimism, risk tolerance, risk aversion, consensus belief

Are risk averse agents more optimistic? A Bayesian estimation approach

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance.This quantity is of particular importance since it characterizes the consensus belief in risk-taking situations with heterogeneous beliefs. Its estimation leads to a nontrivial statistical problem. We start from a large lottery survey (1536 individuals). We assume that individuals have true unobservable characteristics and that their answers in the survey are noisy realizations of these characteristics. We adopt a Bayesian approach for the statistical analysis of this problem and use an hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We obtain that individuals are on average pessimistic and thatpessimism and risk tolerance are positively correlated. As a consequence, we conclude that theconsensus belief is biased towards pessimism.Bayesian estimation, MCMC scheme, importance sampling, pessimism, risk tolerance, risk aversion, consensus belief.

Rules of thumb in life-cycle savings models

We analyze life-cycle savings decisions when households use simple heuristics, or rules of thumb, rather than solve the underlying intertemporal optimization problem. The decision rules we explore are a simple Keynesian rule where consumption follows income; a simple consumption rule where only a fraction of positive income shocks is saved; a rule that corresponds to the permanent income hypothesis; and two rules that have been found in experimental studies. Using these rules, we simulate life-cycle savings decisions numerically and compute the utility losses relative to the backwards solution of the intertemporal optimization problem. Our central finding is that the utility losses induced by rule-of-thumb behavior are relatively low. We conclude that behaving optimally, in the sense of solving an intertemporal optimization model, is not only costly, it is also not much better than using simple heuristics. Our results might also explain why optimization models typically fit the main features of empirical data quite well although optimizing behavior itself is frequently rejected

Are Risk Averse Agents More Optimistic? A Bayesian Estimation Approach

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance. This quantity is of particular importance since it characterizes the consensus belief in risk-taking situations with heterogeneous beliefs. Its estimation leads to a nontrivial statistical problem. We start from a large lottery survey (1,536 individuals). We assume that individuals have true unobservable characteristics and that their answers in the survey are noisy realizations of these characteristics. We adopt a Bayesian approach for the statistical analysis of this problem and use an hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We obtain that individuals are on average pessimistic and that pessimism and risk tolerance are positively correlated. As a consequence, we conclude that the consensus belief is biased towards pessimism.Bayesian estimation, MCMC scheme, importance sampling, pessimism, risk tolerance, risk aversion, consensus belief

Optimal annuity demand in behavioral decision models

The aim of this dissertation is to design and analyze behavioral decision models for the retirement phase of the life-cycle. The proposed decision models combine expected utility theory with the behavioral apects hyperbolic discounting, loss aversion and reference dependence. A thorough optimization is conducted within the models to find the optimal insurance endowments, investment and consumption plans and bequest sizes

Security And Potential Level Preferences With

The security level models of Gilboa (1988) and of Jaffray (1988) as well as the security and potential level model of Cohen (1992) accomodate succesfully classical Allais paradoxa while they offer an interesting explanation for their occurrence. However, experimental data suggest a systematic violation of these models when lotteries with low probabilities of bad or good outcomes are involved. The present paper develops an axiomatic model that allows for thresholds in the perception of security and potential levels. The derived representation of preferences accommodates the observed violations of the original security and potential level models and provides a natural explanation for their occurence. Additionally, a more fundamental problem of the original models is resolved.

DAGEM - A Dynamic Applied General Equilibrium Model for Tax Policy Evaluation

This paper develops - a sequential dynamic general equilibrium model of the U.S. economy - DAGEM. Economic behavior of every agent in this economy is derived from an intertemporal specification of the agent's objectives and constraints. Firms maximize the present value of the net cash flow in a technology with adjustment costs to determine endogenously optimal supplies and optimal demands for the different production inputs. In particular, investment decisions are forward looking. Real investment is financed by retained earnings and issuance of new debt and equity according to exogenously defined rules. Government intertemporal behavior is obtained from the maximization of a social welfare function defined over the domain of a public good and subject to an intertemporal budget constraint. The government is allowed to run deficits which are financed by issuing bonds. Optimal household behavior follows a life-cycle type of model generating endogenous savings and labor-leisure decisions. Household asset portfolio decisions merely accommodate the composition of demand for funds. Equilibrium in this economy is conceived as a temporary Walrasian equilibrium. All the markets clear, hence the Walrasian nature of equilibrium. Also, equilibrium in the short run is such that market clearing prices are parametric on the expectation formation rules, hence the temporary nature of equilibrium. The second part of this paper addresses problems of implementation and policy analysis with the DAGEM. In the context of applied general equilibrium analysis, policy evaluations are typically carried out by contrasting a base case reflecting the status quo and several counterfactual equilibria reflecting different scenarios generated by the policy change under consideration. First, it is necessary to specify the base case equilibrium. In particular, the data requirements are reviewed and sources provided. Secondly, the different equilibria are made comparable by the use of the concept of equal yield. The concept of equal yield is generalized to accommodate the existence of government deficits. Thirdly, the information contained in the different equiljbria is synthesized by using a scalar indicator. This indicator is the dynamic generalization of the Hicksian compensation tests to a context in Which expectations are not self-fulfilling, and no future markets exist. This chapter contains also a discussion of the computation strategy and, in particular, the computation algorithm. This paper concludes with a critical assessment of the DAGEM in terms of modeling and implementation as well as suggestions for future research. The potential of the methodology developed in this paper is emphasized. In particular, the merits of DAGEM to address several public finance issues, like the possible re-introduction of investment tax credits or the effects of political measures tending to balance the government budget, are discussed.N/

Optimal life-cycle capital taxation under self-control problems

We study optimal taxation of savings in an economy where agents face self-control problems, and we allow the severity of self-control to change over the life cycle. We focus on quasi-hyperbolic discounting with constant elasticity of inter-temporal substitution utility functions and linear Markov equilibria. We derive explicit formulas for optimal taxes that implement the efficient (commitment) allocation. We show, analytically, that if agents’ ability to self-control increases concavely with age, then savings should be subsidised and the subsidy should decrease with age. We also study the quantitative effects of age-dependent self-control problems and find that the optimal subsidies in our environment are much larger than those implied by models with constant self-control. Finally, we compare our optimal subsidies with those implied by the 401(k) plan. Although the subsidy levels in the two cases are of comparable magnitudes, the 401(k) plan implies an increasing pattern of subsidies while the optimal subsidies decrease over the life cycle