Prospect relativity: How choice options influence decision under risk

In many theories of decision under risk (e.g., expected utility theory, rank-dependent utility theory, and prospect theory), the utility of a prospect is independent of other options in the choice set. The experiments presented here show a large effect of the available options, suggesting instead that prospects are valued relative to one another. The judged certainty equivalent for a prospect is strongly influenced by the options available. Similarly, the selection of a preferred prospect is strongly influenced by the prospects available, Alternative theories of decision under risk (e.g., the stochastic difference model, multialternative decision field theory, and range frequency theory), where prospects are valued relative to one another, can provide an account of these context effects

Prospect relativity: how choice options influence decision under risk.

In many theories of decision under risk (e.g., expected utility theory, rank-dependent utility theory, and prospect theory), the utility of a prospect is independent of other options in the choice set. The experiments presented here show a large effect of the available options, suggesting instead that prospects are valued relative to one another. The judged certainty equivalent for a prospect is strongly influenced by the options available. Similarly, the selection of a preferred prospect is strongly influenced by the prospects available. Alternative theories of decision under risk (e.g., the stochastic difference model, multialternative decision field theory, and range frequency theory), where prospects are valued relative to one another, can provide an account of these context effects

Risky Decisions in the Large and in the Small: Theory and Experiment

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The Role of area-yield crop insurance program face to the Mid-term Review of Common Agricultural Policy

The mid-term review of Common Agricultural Policy increases the complexity of the decision-making process of farmers. The subsidies are substituted for a single decoupled income payment. The farmers decide what crops and livestock will produce based on climate, soils conditions and agricultural market signals and not based on subsidies granted to each one of the crop and livestock activities. The area-yield crop insurance program might have an important role on increasing production and facing natural catastrophes. This paper studies the introduction of the area-yield crop insurance program to reduce the risk originating from the variability of farmers' income and to compare this alternative with other agricultural policy alternatives in the context of the mid-term review of Common Agricultural Policy. The comparison of the introduction of the area-yield crop insurance program with other agricultural policy alternatives is made through an approach using concepts of the Cumulative Prospect Theory, because besides defining that the results are appraised in agreement with changes in relation to the initial wealth, this theory treats in a differentiated way gains and losses. A discrete sequential stochastic programming model with five states of nature is developed to study agricultural policy alternatives. The objective function is constituted by a set of functions (the value function and the probability weighting function) differentiated for gains and losses, in that the total value of the game is given by the sum of the positive and negative components. 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 of Portugal. The set of constraint restrictions describes the environment in which the Alentejo farmers develop their crop and livestock activities in all their components: production, financial, marketing and taxes. Model results show the introduction of the area-yield crop insurance program with full decoupling of income payments from agricultural production under the mid-term review of the Common Agricultural Policy has positive effects in the agricultural production. This new Agricultural Policy guarantees a minimum farm income, while the area-yield crop insurance program allows making face to the agricultural production variability and avoids the abandonment of the farming activity in the Alentejo dryland region.Cumulative Propospect Theory, Mid-Term Review of the Common Agricultural Policy, Discrete Sequential Stochastic Programming Model, Area-Yield Crop Insurance program, Risk and Uncertainty,

Debiasing EQ-5D Tariffs. New estimations of the spanish EQ-5D value set under nonexpected utility

Este proyecto tiene como objetivo estimar las utilidades asociadas a los estados de salud definidos mediante el sistema EuroQol-5D a partir de la medición directa de las preferencias de una muestra de la población andaluza. Los valores obtenidos serán susceptibles de ser utilizados en el marco de estudios de evaluación económica de políticas sanitarias (análisis coste-utilidad) realizados en la comunidad andaluza y en el conjunto del estado. Para la valoración directa de un subconjunto de estados de salud se realizará una encuesta personal asistida por ordenador a una muestra representativa por sexo y cuotas de edad de la población española, extraída de la población residente en Andalucía. Los métodos que se aplicarán para obtener las preferencias y calcular las utilidades tratarán de corregir algunos de los sesgos que pueden afectar a las estimaciones existentes. Así, se adoptarán enfoques teóricos alternativos a los habitualmente empleados que permitirán relajar algunos de los supuestos que han sido puestos en cuestión a la luz de la evidencia empírica, como es el caso de la linealidad de la función de utilidad del tiempo de vida, la validez descriptiva de la teoría de la utilidad esperada o la separabilidad multiplicativa de las preferencias por cantidad y calidad de vida.EQ-5D, social tariff, utility curvature, probability weighting, rank-dependent utility, time trade-off, value lottery equivalence, certainlty equivalence

Do Individuals Learn To Maximise Expected Utility?

Violations of expected utility theory are sometimes attributed to imprecise preferences interacting with a lack of learning opportunity in the experimental laboratory. This paper reports a test of whether conditions which facilitate objective probability learning yield decisions better described by expected utility theory than is the case in experiments devoid of learning opportunity. The data show that expected utility maximising behaviour increases with the learning opportunity, but so too do systematic violations. Learning, therefore, may exacerbate choice anomalies.

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,

Myopic, Naive, Resolute or Sophisticated? A study of how people take dynamic decisions

Potentially dynamically-inconsistent individuals create particular problems for economics, as their behaviour depends upon whether and how they attempt to resolve their potential inconsistency. This paper reports on the results of a new experiment designed to help us distinguish between the different types that may exist. We classify people into four types: myopic, naive, resolute and sophisticated. We implement a new and simple experimental design in which subjects are asked to take two sequential decisions (interspersed by a random move by Nature) concerning the allocation of a given sum of money. The resulting data enables us to classify the subjects. We find that the majority are resolute, a significant minority are sophisticated and rather few are naive or myopic.dynamic inconsistency, sequential choice, myopic, naive, resolute, sophisticated