Diversification Preferences in the Theory of Choice

Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This corresponds to the notion of risk aversion when one assumes the von-Neumann-Morgenstern expected utility model, but the equivalence fails to hold in other models. This paper studies axiomatizations of the concept of diversification and their relationship to the related notions of risk aversion and convex preferences within different choice theoretic models. Implications of these notions on portfolio choice are discussed. We cover model-independent diversification preferences, preferences within models of choice under risk, including expected utility theory and the more general rank-dependent expected utility theory, as well as models of choice under uncertainty axiomatized via Choquet expected utility theory. Remarks on interpretations of diversification preferences within models of behavioral choice are given in the conclusion

Crop price indemnified loans for farmers

Farmers face a particular set of risks that complicate the decision to borrow. We use a randomized experiment to investigate (1) the role of crop-price risk in reducing demand for credit among famers and (2) how risk mitigation changes farmers’ investment decisions. In rural Ghana, we offer farmers loans with an indemnity component that forgives 50 percent of the loan if crop prices drop below a threshold price. A control group is offered a standard loan product at the same interest rate. We find similar rates of loan uptake among all farmers and little significant impact of the indemnity component on uptake or other outcomes of interest, with the exception of higher likelihoods of garden egg cultivation and sales to market traders rather than at farmgate among recipients of indemnified loans.agricultural credit, clustered randomized control trial, crop price insurance, crop prices, Impact evaluation, underinvestment,

Perceived Ambiguity, Ambiguity Attitude and Strategic Ambiguity in Games

This thesis contributes to the theoretical work on decision and game theory when decision makers or players perceive ambiguity. The first article introduces a new axiomatic framework for ambiguity aversion and provides axiomatic characterizations for important preference classes that thus far had lacked characterizations. The second article introduces a new axiom called Weak Monotonicity which is shown to play a crucial role in the multiple prior model. It is shown that for many important preference classes, the assumption of monotonic preferences is a consequence of the other axioms and does not have to be assumed. The third article introduces an intuitive definition of perceived ambiguity in the multiple prior model. It is shown that the approach allows an application to games where players perceive strategic ambiguity. A very general equilibrium existence result is given. The modelling capabilities of the approach are highlighted through the analysis of examples. The fourth article applies the model from the previous article to a specific class of games with a lattice-structure. We perform comparative statics on perceived ambiguity and ambiguity attitude. We show that more optimism does not necessarily lead to higher equilibria when players have Alpha-Maxmin preferences. We present necessary and sufficient conditions on the structure of the prior sets for this comparative statics result to hold. The introductory chapter provides the basis of the four articles in this thesis. An overview of axiomatic decision theory, decision-making under ambiguity and ambiguous games is given. It introduces and discusses the most relevant results from the literature

A Counterexample to Three Imprecise Decision Theories

There is currently much discussion about how decision making should proceed when an agent’s degrees of belief are imprecise; represented by a set of probability functions. I show that decision rules recently discussed by Sarah Moss, Susanna Rinard and Rohan Sud all suffer from the same defect: they all struggle to rationalise diachronic ambiguity aversion. Since ambiguity aversion is among the motivations for imprecise credence, this suggests that the search for an adequate imprecise decision rule is not yet over

An extension of the Becker proposition to non-expected utility theory

In a seminal paper, Becker (1968) showed that the most efficient way to deter crime is to impose the severest possible penalty (to maintain adequate deterrence) with the lowest possible probability (to economize on costs of enforcement). We shall call this the Becker proposition (BP). The BP is derived under the assumptions of expected utility theory (EU). However, EU is heavily rejected by the evidence.  A range of non-expected utility theories have been proposed to explain the evidence.  The two leading alternatives to EU are rank dependent utility (RDU) and cumulative prospect theory (CP). The main contributions of this paper are: (1) We formalize the BP in a more satisfactory manner. (2) We show that the BP holds under RDU and CP. (3) We give a formal behavioral approach to crime and punishment that could have applicability to a wide range of problems in the economics of crime.Crime and punishment; non-linear weighting of probabilities; cumulative prospect theory; rank dependent utility; probability weighting functions; punishment functions.

Indecision Theory: Quality of Information and Voting Behavior

In this paper we show how to incorporate quality of information into a model of voting behavior. We do so in the context of the turnout decision of instrumentally rational voters who differ in their quality of information, which we refer to as ambiguity. Ambiguity is reflected by the fact that the voter's beliefs are given by a set of probabilities, each of which represents in the voter's mind a different possible scenario. We show that in most elections voters who satisfy the Bayesian model do not strictly prefer abstaining over voting for one of the candidates. In contrast, a voter who is averse to ambiguity considers abstention strictly optimal when the candidates' policy positions are both ambiguous and they are “ambiguity complements". Abstaining is preferred since it is tantamount to mixing the prospects embodied by the two candidates, thus enabling the voter to “hedge" the candidates' ambiguity

Ambiguity Aversion and Trade

What is the effect of ambiguity aversion on trade? Although in a Bewley's model ambiguity aversion always lead to less trade, in other models this is not always true. However, we show that if the endowments are unambiguous then more ambiguity aversion implies less trade, for a very general class of preferences. The reduction in trade caused by ambiguity aversion can be as severe as to lead to no-trade. In an economy with MEU decision makers, we show that if the aggregate endowment is unanimously unambiguous then every Pareto optima allocation is also unambiguous. We also characterize the situation in which every unanimously unambiguous allocation is Pareto optimal. Finally, we show how our results can be used to explain the home-bias effect. As a useful result for our methods, we also obtain an additivity theorem for CEU and MEU decision makers that does not require comonotonicity. JEL Classification Numbers: D51, D6, D8

Stochastic Dominance and Nonparametric Comparative Revealed Risk Aversion

It is shown how to test revealed preference data on choices under uncertainty for consistency with first and second order stochastic dominance (FSD or SSD). The axiom derived for SSD is a necessary and sufficient condition for risk aversion. If an investor is risk averse, stochastic dominance relations can be combined with revealed preference relations to recover a larger part of an investor‘s preference. Interpersonal comparison between investors can be based on intersections of revealed preferred and worse sets. Using a variant of Yaari‘s (1969) defi nition of “more risk averse than”, it is shown that it is sufficient to compare only the revealed preference relations of two investors. This makes the approach operational given a fi nite set of observations. The central rationalisability theorem provides strong support for this approach to comparative risk aversion. The entire analysis is kept completely nonparametric and can be used as an alternative or complement to parametric approaches and as a robustness check. The approach is illustrated with an application to experimental data of by Choi et al. (2007). Most subjects come close to SSD-rationality, and most subjects are comparable with each other. The distribution of risk attitudes in the population can be described by comparing subjects‘ choices with any given preference, which is also illustrated.Comparative risk aversion; experimental economics; induced budget experiments; interpersonal comparison; nonparametric analysis; portfolio choice; revealed preference; risk preference