Joker: Choice in a simple game with large stakes

This paper examines data from the Norwegian television game show Joker, where contestants make well-specified choices under risk. The game involves very large stakes, randomly drawn contestants, and ample opportunities for learning. Expected utility (EU) theory gives a simple prediction of choice under weak conditions, as one choice is always first-order stochastically dominating. We document frequent, systematic and costly violations of dominance. Most alternative theories fail to add explanatory power beyond the EU benchmark, but many contestants appear to have a systematic expectation bias that cam be related to Tversky and Kahneman's (1973) ""availability heuristic"". In addition, there seems to be a stochastic element in choice that is well captured by the so-called Fechner model.Risky choice, stochastic dominance, choice models, stakes, game show

Joker: Choice in a simple game with large stakes

This paper examines data from the Norwegian television game show Joker, where contestants make well-specified choices under risk. The game involves very large stakes, randomly drawn contestants, and ample opportunities for learning. Expected utility (EU) theory gives a simple prediction of choice under weak conditions, as one choice is always first-order stochastically dominating. We document frequent, systematic and costly violations of dominance. Most alternative theories fail to add explanatory power beyond the EU benchmark, but many contestants appear to have a systematic expectation bias that can be related to Tversky and Kahneman?s (1973) "availability heuristic". In addition, there seems to be a stochastic element in choice that is well captured by the so-called Fechner model.Risky choice; stochastic dominance; choice models; stakes; game show

International Portfolio of Real Estate Investment and Hedging: A Revisit

We use office data from ten cities in the Asia-Pacific region from 4Q2001 to 2Q2012 to propose a forward-looking investment appraisal framework to compare the effectiveness of two currency risk hedging strategies for a portfolio of real estate investments in ten cities of seven Asia-Pacific countries. This is aimed at determining the optimal choice among “unhedged”, “artificially” hedged and “natural” hedged options. Analyses based on NPV, IRR, Sharpe Ratio, Jensen’s alpha and stochastic dominance were done for 3, 5 and 7-year holding periods. All the results show that the “natural” hedge strategy is the optimal choice as it provides superior returns

Elicitation of Preferences under Ambiguity

This paper is about behaviour under ambiguity ‒ that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a ‘state of the world’ with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α­-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α­-MEU

A Bias Aggregation Theorem

In a market where some traders are rational (maximize expected utility) and others are systematically biased (deviate from expected utility due to some bias parameter, q), do equilibrium prices necessarily depend on q? In this note, focusing on the case where there is an aggregate and systematic bias in the population, we show that market prices can still be unbiased. Hence, we establish that systematically biased agents do not necessarily imply biased market prices. We show that the parametric model we use also predicts observed deviations from expected utility in laboratory and market environments

Distortion Risk Measures or the Transformation of Unimodal Distributions into Multimodal Functions

URL des Documents de travail : http://ces.univ-paris1.fr/cesdp/cesdp2014.html Chapitre dans "Future Perspectives in Risk Models and Finance", eds. A. Bensoussan, D. Guegan, C. Tapiero, Volume 211 of the series International Series in Operations Research & Management Science, 89-124, 2015Documents de travail du Centre d'Economie de la Sorbonne 2014.08 - ISSN : 1955-611XThe particular subject of this paper, is to construct a general framework that can consider and analyse in the same time upside and downside risks. This paper offers a comparative analysis of concept risk measures, we focus on quantile based risk measure (ES and VaR), spectral risk measure and distortion risk measure. After introducing each measure, we investigate their interest and limit. Knowing that quantile based risk measure cannot capture correctly the risk aversion of risk manager and spectral risk measure can be inconsistent to risk aversion, we propose and develop a new distortion risk measure extending the work of Wang (2000) [38] and Sereda et al (2010) [34]. Finally, we provide a comprehensive analysis of the feasibility of this approach using the S&P500 data set from o1/01/1999 to 31/12/2011.Ce papier propose un cadre général qui permet d'analyser dans le même temps les risques à la hausse et la baisse. Après une revue (avec limites et intérêt) sur les mesures de risques classiques : VaR, ES et mesure spectrale, nous proposons et développons une nouvelle mesure du risque appeler mesure de distorsion qui étend le travail de Wang (2000) et Sereda et al (2010) pour des distributions bimodales et multimodales

Comonotonic Independence: The Critical Test between Classical and Rank-Dependent Utility Theories

This article compares classical expected utility (EU) with the more general rank-dependent utility (RDU) models. The difference between the independence condition for preferences of EU and its comonotonic generalization in RDU provides the exact demarcation between EU and rank-dependent models. Other axiomatic differences are not essential. An experimental design is described that tests this difference between independence and comonotonic independence in its most basic form and is robust against violations of other assumptions that may confound the results, in particular the reduction principle and transitivity. It is well known that in the classical counterexamples to EU, comonotonic independence performs better than full-force independence. For our more general choice pairs, however, we find that comonotonic independence does not perform better. This is contrary to our prior expectation and suggests that rank-dependent models, in full generality, do not provide a descriptive improvement over EU. For rank-dependent models to have a future, submodels and choice situations need to be identified for which rank-dependence does contribute descriptively

Utility Measurement in Integrative Negotiation

This paper develops an adjustment to utility measurement in integrative negotiation where the negotiation information context is incomplete. The developed function reveals not only win-win outcomes but also deceptive practices where negotiators accept a win-lose deal and then compensate their loss in a deceptive way and greedy practices where negotiators realize their strong competitive position and try to extremely maximize their gains. However, to realize the objective, the utility measurement function literature and theories are reviewed to determine the relevant function structure and the necessary attributes that reveal the desired outcome in an incomplete information context. After examination, relationship measurement is added to the function under two utilities: Decision Utility and Experienced Utility. The foundation of the utility measurement function contributes to revealing satisfying win-win outcomes in an incomplete information negotiation context. Therefore, it develops the negotiation field by designing win-win deals that are beneficial and satisfying in which the advantage is distributed between the negotiators

Anticipated Utility: Some Developments in the Economic Theory of Uncertainty

This thesis is a study in the economics of uncertainty. The literature in this field has grown so rapidly that even a survey of the field as a whole would require more space than is available here. Nevertheless, I have aimed at a kind of completeness. My object has been to present an integrated development from basic notions of choice and uncertainty to theoretical and policy applications. My central claim is that Expected Utility theory has been superseded by more general models which retain its desirable properties such as transitivity and preservation of dominance while being consistent with behavior which is proscribed by Expected Utility theory but frequently observed in practice. One such general model, Anticipated Utility theory, is developed in detail in the thesis