A Satisficing Alternative to Prospect Theory

In this paper, we axiomatize a target-based model of choice that allows decision makers to be both risk averse and risk seeking, depending on the payoff's position relative to a prespecified target. The approach can be viewed as a hybrid model, capturing in spirit two celebrated ideas: first, the satisficing concept of Simon (1955); second, the switch between risk aversion and risk seeking popularized by the prospect theory of Kahneman and Tversky (1979). Our axioms are simple and intuitive; in order to be implemented in practice, our approach requires only the specification of an aspiration level. We show that this approach is dual to a known approach using risk measures, thereby allowing us to connect to existing theory. Though our approach is intended to be normative, we also show that it resolves the classical examples of Allais (1953) and Ellsberg (1961).satisficing; aspiration levels; targets; prospect theory; reflection effect; risk measures; coherent risk measures; convex risk measures; portfolio optimization

Elitism and Stochastic Dominance

Stochastic dominance has been typically used with a special emphasis on risk and in-equality reduction something captured by the concavity of the utility function in the expected utility model. We claim that the applicability of the stochastic dominance ap-proach goes far beyond risk and inequality measurement provided suitable adaptations be made. We apply in the paper the stochastic dominance approach to the measurement of elitism which may be considered the opposite of egalitarianism. While the usual stochastic dominance quasi-orderings attach more value to more equal and more effi-cient distributions, our criteria ensure that, the more unequal and the more efficient the distribution, the higher it is ranked. Two instances are provided by (i) comparisons of scientific performance across institutions like universities or departments, and (ii) com-parisons of affluence as opposed to poverty between countries.Decumulative Distribution Functions, Stochastic Dominance, Regressive Transfers, Elitism, Scientific Performance, Affluence

Elitism and Stochastic Dominance

Stochastic dominance has typically been used with a special emphasis on risk and inequality reduction something captured by the concavity of the utility function in the expected utility model. We claim that the applicability of the stochastic dominance approach goes far beyond risk and inequality measurement provided suitable adpations be made. We apply in the paper the stochastic dominance approach to the measurment of elitism which may be considered the opposite of egalitarianism. While the usual stochastic dominance quasi-orderings attach more value to more equal and more efficient distributions, our criteria ensure that the more unequal and the more the efficient the distribution, the higher it is ranked. two instances are provided by (i) comparisons of scientific performance across institutions like universities or departments and (ii) comparisons of affluence as opposed to poverty across countries.Decumulative distribution functions; Stochastic dominance; Regressive transfers; Elitism; Scientific Performance; Affluence

Analytic Models of the ROC Curve: Applications to Credit Rating Model Validation

In this paper, the authors use the concept of the population ROC curve to build analytic models of ROC curves. Information about the population properties can be used to gain greater accuracy of estimation relative to the non-parametric methods currently in vogue. If used properly this is particularly helpful in some situations where the number of sick loans is rather small; a situation frequently met in periods of benign macro-economic background.validation; credit analysis; rating model; ROC; Basel II

Investment incentives and auction design in electricity markets

Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format

Affirmative Action: One Size Does Not Fit All

This paper identifies a new reason for giving preferences to the disadvantaged using a model of contests. There are two forces at work: the effort effect working against giving preferences and the selection e¤ect working for them. When education is costly and easy to obtain (as in the U.S.), the selection effect dominates. When education is heavily subsidized and limited in supply (as in India), preferences are welfare reducing. The model also shows that unequal treatment of identical agents can be welfare improving, providing insights into when the counterintuitive policy of rationing educational access to some subgroups is welfare improving

Big data, computational science, economics, finance, marketing, management, and psychology: connections

The paper provides a review of the literature that connects Big Data, Computational Science, Economics, Finance, Marketing, Management, and Psychology, and discusses some research that is related to the seven disciplines. Academics could develop theoretical models and subsequent econometric and statistical models to estimate the parameters in the associated models, as well as conduct simulation to examine whether the estimators in their theories on estimation and hypothesis testing have good size and high power. Thereafter, academics and practitioners could apply theory to analyse some interesting issues in the seven disciplines and cognate areas

Social Welfare, Inequality and Deprivation

We provide a characterization of the generalised satisfaction -- in our terminology non-deprivation -- quasi-ordering introduced by S.R. Chakravarty (Keio Economic Studies 34 (1997), 17--32) for making welfare comparisons based on the absence of deprivation. We show that the non-deprivation quasi-ordering obeys a weaker version of the principle of transfers: welfare improves only for specific combinations of progressive transfers which require that the same amount be taken from richer individuals and allocated to one arbitrary poorer individual. We identify the subclass of extended Gini social welfare functions that are consistent with this principle and we show that the unanimity of value judgements among this class is identical to the ranking of distributions implied by the non-deprivation quasi-ordering. We extend the approach to the measurement of inequality by considering the corresponding relative and absolute ethical inequality indices.Export diversification, FDI, Growth, MENA, GMM system