CUMULATIVE PROSPECT THEORY: A STUDY OF THE FARMERS' DECISION BEHAVIOR IN THE ALENTEJO DRYLAND REGION OF PORTUGAL

The mid-term review of the Common Agricultural Policy will change the way the European Union supports its farm sector. The new Common Agricultural Policy will be geared towards consumers, and taxpayers, while giving farmers the freedom to produce what the market wants. In the future, the majority of the subsidies will be paid independentlty from the volume of production. To avoid abandonment of production, Member States may choose to maintain a limited link between subsidy and production under well conditions and within clear limits. These new "single farm payment" will be linked to the respect of environmental, food safety and animal welfare standards. Severing the link between subsidies and production will make farmers more competitive and market oriented, while providing the necessary income stability. As the subsidy becomes a common component of all the alternatives of decision, the farmer will segregate that common component of the problem in the edition phase, starting to make decisions with base in negative results, what can determine the abandonment of the farming activity. This research work intends to know, to characterize and to identify the farmers' behavior in the Alentejo dryland region of Portugal, when they face to the emerging reality of the new Common Agricultural Policy. The Cumulative Prospect Theory allows to model the farmers' behavior, because besides defining that the results are appraised in agreement with variations in relation to the initial wealth, this theory treats in a differentiated way gains and losses. The value functions and the weighting probabilities are elicited by the Trade-off and Certainty Equivalent methods for a group of farmers in the Alentejo dryland region. These functions will constitute the objective function of a discrete sequential stochastic programming model, whose restrictions describe the crop and livestock farms in their productive, financial, commercial and taxes components. Model results show that the introduction of the total decoupling payments leads to the abandonment of the crop production in the Alentejo dryland region and an increase of the livestock production in the natural pastures. The crop farms stop producing, except the farms that have good soils continue to produce, although these farms do not produce durum wheat and they start to produce barley and oats. With respect to the beef cattle farms, these farms maintain the number of cattle heads, they increase the pasture and forage areas and they substitute durum wheat for oats and barley. The sheep farms reduce the number of cattle heads drastically and they substitute durum wheat for barley and oats.Farm Management,

What Determines the Shape of the Probability Weighting Function?

When valuing risky prospects, people typically overweight small probabilities and underweight medium and large probabilities, but there is vast heterogeneity in individual behavior. We explore the relationship between person-specific probability weights, estimated from investment decisions in a laboratory experiment, and personal characteristics. We find considerable interaction effects with gender. While women’s probability weighting is strongly and significantly susceptible to mood states, men’s is not. Moreover, we show that cheerful and optimistic people weight probabilities of investment gains more favorably than do pessimistic people. People who calculate expected payoffs are less prone to probability distortions than those who do not use a lottery’s expected value as a decision criterion. None of the factors studied impact subjects’ valuations of monetary outcomes.Probability Weighting Function, Prospect Theory, Risk Aversion, Gender Differences

Endogenous Prospect Theory.

In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This paper provides an axiomatization of a new specification of cumulative prospect theory, termed endogenous prospect theory, where reference-dependence is derived from preference conditions and a unique reference point arises endogenously.prospect theory; reference point; diminishing sensitivity; loss aversion;

Attributes and weights in health care priority setting: a systematic review of what counts and to what extent

In most societies resources are insufficient to provide everyone with all the health care they want. In practice, this means that some people are given priority over others. On what basis should priority be given? In this paper we are interested in the general public's views on this question. We set out to synthesis what the literature has found as a whole regarding which attributes or factors the general public think should count in priority setting and what weight they should receive. A systematic review was undertaken (in August 2014) to address these questions based on empirical studies that elicited stated preferences from the general public. Sixty four studies, applying eight methods, spanning five continents met the inclusion criteria. Discrete Choice Experiment (DCE) and Person Trade-off (PTO) were the most popular standard methods for preference elicitation, but only 34% of all studies calculated distributional weights, mainly using PTO. While there is heterogeneity, results suggest the young are favoured over the old, the more severely ill are favoured over the less severely ill, and people with self-induced illness or high socioeconomic status tend to receive lower priority. In those studies that considered health gain, larger gain is universally preferred, but at a diminishing rate. Evidence from the small number of studies that explored preferences over different components of health gain suggests life extension is favoured over quality of life enhancement; however this may be reversed at the end of life. The majority of studies that investigated end of life care found weak/no support for providing a premium for such care. The review highlights considerable heterogeneity in both methods and results. Further methodological work is needed to achieve the goal of deriving robust distributional weights for use in health care priority setting.12 page(s

Cumulative prospect theory and second order stochastic dominance criteria: an application to mutual funds performance

In this note using the rules of stochastic dominance of the second order and the recent cumulative prospect theory for classified, according to their performance, a set of common funds. The criteria used are closely linked to the preferences of decision maker and refer to either hypothesis of aversion and of seeking to risk both hypothesis on the sign of derived second of the function which characterizes the losses and gains.

Modelling travellers’ risky choice behaviour in revealed preference contexts: A comparison of EUT and non-EUT approaches

Recent work on risky choice modelling has sought to address the theoretical shortcomings of expected utility theory (EUT) by using non-expected utility theoretic (non-EUT) approaches. To date, however, there is little evidence to show whether the complexity of non-EUT actually leads to better model performance. Moreover, almost all the relevant research has adopted stated choice data which, although flexible and cheap, has limited validity. This thesis empirically investigates the feasibility and validity of non-EUT approaches in revealed preference (RP) contexts, in which travel time distribution is extracted from historical travel time data to subsequently present systematic comparisons between EUT and non-EUT approaches. Additionally, this thesis also discusses implementations based on these empirical results and, in particular, highlights the influence of non-EUT on the valuation of travel time savings. A risky choice framework is proposed so as to incorporate non-EUT into a Random Utility Maximization structure. The non-EUT approaches modelled in the thesis consist of Subjective Expected Value Theory, Subjective Expected Utility Theory, Weighted Utility theory, Rank Dependent Expected Value, Rank Dependent Expected Utility, Prospect Theory, and Cumulative Prospect Theory. The first dataset is collected from the SR91 corridor in California and involves a choice between a free flowing and reliable tolled facility and a congested and unreliable un-tolled facility. The second case study is based on the London Underground (LU) system and involves the choice between alternative competitive underground services linking pairs of stations. This thesis provides insights into how EUT and non-EUT models perform in the real world. The RP methodology and risky choice framework offers an avenue for future research to identify a wider range of alternative choice theories using realistic data. The empirical results suggest that there are merits in applying non-EUT to the modelling of travellers’ risky choice behaviours.Open Acces

Integrating Ecological And Economic Aspects In Land Use Concepts: Some Conclusions From A Regional Land Use Concept For Bayerisches Donauried

Land use concepts for ecologically particularly sensitive agricultural landscapes are often focussed on the attainment of specific environmental objectives in specific areas, neglecting both socio-economic effects, in particular income effects, and the farmers' income-driven production responses outside these areas. The paper illustrates, on the basis of an empirical study on the land use in the southern German region Bayerisches Donauried, (1) that the farmers' objectives and production responses need to be integrated in land use concepts for agricultural landscapes because of their potentially counterproductive effects on the attainment of environmental objectives, and (2) how multi-criteria analysis (MCA) can be used to transform a primarily ecology-oriented land use concept for an ecologically very sensitive agricultural landscape into a more comprehensive one that makes due allowance for the farmers responses and society's socio-economic objectives. The authors show that such integration of socioeconomic objectives can contribute to the maintenance of incomes and employment without overly harming the attainment of ecological goals. As far as the MCA is concerned, two methods are applied: The linear-additive model, and the outranking model ELECTRE. The models serve to evaluate four different land use options. Nine criteria are used, derived from the relevant landscape functions. Weights are based on written interviews with major decision-makers, and stakeholders of the region. The major assumptions underlying the models are discussed. The authors interpret the results of each model on the basis of sensitivity analyses, and compare them. Finally, the paper discusses policy implications resulting from the implementation of land use concepts for agricultural landscapes, in particular the question of a regionalisation of agri-environmental policy, and raises some administrative and practical issues that come up if policy makers apply MCA more widely in the design of such concepts.Land Economics/Use,

Know Thyself: Self Awareness and Utility Misprediction in Discounting Models of Intertemporal Choice

This review critically discusses the theoretical models of discounting through a selection of papers. It will focus on the comparison between the two major models, namely discounted utility and hyperbolic discounting. This paper differs from previous surveys in the attention given to the interpretation of models and suggestions for future research. First, it stresses how the economics literature is biased itself, since it considers only present-biased preferences on the basis of not well grounded evidence, while also future-biased preferences are worthwhile of attention to address relevant issues, like compulsive behaviors and work-life unbalance. Second, it makes qualifications on the meaning of self-awareness, distinguishing between cognitive boundaries and beliefs. Third, it suggests future direction of research to address this issue, fundamental for a sound policy analysis, by showing how the two main welfare criteria used in the literature to evaluate welfare of inconsistent individuals (long-run utility and Pareto criterion) have relevant shortcomings. Finally, it proposes a new perspective on misprediction of utility based on time perceptionfuture - biased preferences; intertemporal choice; partial naivete; self - control; sophistication; time inconsistency