Cumulative prospect theory and gambling

Whilst Cumulative Prospect theory (CPT) provides an explanation of gambling on longshots at actuarially unfair odds, it cannot explain why people might bet on more favoured outcomes. This paper shows that this is explicable if the degree of loss aversion experienced by the agent is reduced for small-stake gambles (as a proportion of wealth), and probability distortions are greater over losses than gains. If the utility or value function is assumed to be bounded, the degree of loss aversion assumed by Kahneman and Tversky leads to absurd predictions, reminiscent of those pointed out by Rabin (2000), of refusal to accept infinite gain bets at low probabilities. Boundedness of the value function in CPT implies that the indifference curve between expected-return and win-probability will typically exhibit both an asymptote (implying rejection of an infinite gain bet) and a minimum at low probabilities, as the shape of the value function dominates the probability weighting function. Also the high probability section of the indifference curve will exhibit a maximum. These implications are consistent with outcomes observed in gambling markets.

Bubbles in House Prices and their Impact on Consumption: Evidence for the US

This paper provides evidence that some aggregate and regional U.S. real house price indices exhibited a bubble in the last few years according to the Phillips et al. (2007) unit root test. We subsequently investigate whether house price acceleration (deceleration) had a signi.cant impact on consumption in an error correction mechanism implied by a wide class of optimizing models. Our results support the argument that real house prices have their major effect on consumption only during the bubble period

Are analysts' loss functions asymmetric?

Recent research by Gu and Wu (2003) and Basu and Markov (2004) suggests that the well-known optimism bias in analysts? earnings forecasts is attributable to analysts minimizing symmetric, linear loss functions when the distribution of forecast errors is skewed. An alternative explanation for forecast bias is that analysts have asymmetric loss functions. We test this alternative explanation. Theory predicts that if loss functions are asymmetric then forecast error bias depends on forecast error variance, but not necessarily on forecast error skewness. Our results confirm that the ex ante forecast error variance is a significant determinant of forecast error and that, after controlling for variance, the sign of the coefficient on forecast error skewness is opposite to that found in prior research. Our results are consistent with financial analysts having asymmetric loss functions. Further analysis reveals that forecast bias varies systematically across style portfolios formed on book-to-price and market capitalization. These firm characteristics capture systematic variation in forecast error variance and skewness. Within style portfolios, forecast error variance continues to play a dominant role in explaining forecast error.

Are analysts? loss functions asymmetric?

Recent research by Gu and Wu (2003) and Basu and Markov (2004) suggests that the well-known optimism bias in analysts? earnings forecasts is attributable to analysts minimizing symmetric, linear loss functions when the distribution of forecast errors is skewed. An alternative explanation for forecast bias is that analysts have asymmetric loss functions. We test this alternative explanation. Theory predicts that if loss functions are asymmetric then forecast error bias depends on forecast error variance, but not necessarily on forecast error skewness. Our results confirm that the ex ante forecast error variance is a significant determinant of forecast error and that, after controlling for variance, the sign of the coefficient on forecast error skewness is opposite to that found in prior research. Our results are consistent with financial analysts having asymmetric loss functions. Further analysis reveals that forecast bias varies systematically across style portfolios formed on book-to-price and market capitalization. These firm characteristics capture systematic variation in forecast error variance and skewness. Within style portfolios, forecast error variance continues to play a dominant role in explaining forecast error.

The Grass is Not Always Greener: Congressional Dysfunction, Executive Action, and Climate Change in Comparative Perspective

Partisan climate change politics, paired with a legislative branch that is often deeply divided between two parties, has led to congressional gridlock in the United States. Numerous efforts at passing comprehensive climate change legislation have failed, and little prospect exists for such legislation in the foreseeable future. As a result, executive action under existing federal environmental statutes—often in interaction with litigation—has become the primary mechanism for national-level regulation of greenhouse gas emissions from motor vehicles and power plants. Although many observers critique this state of affairs and wish for a legislature more able to act, this essay argues that more unified government paired with partisanship is also problematic. Using the Australian experience of climate change regulation as an example of an alternative pathway, it demonstrates the ways in which a deeply divided country with a parliamentary system of government can have unstable policy that changes more significantly with each administration. It considers the benefits and limitations of each approach, and explores possibilities for a better way forward

Energy Partisanship

Whether the topic is the Paris Agreement on climate change, greenhouse gas emissions from power plants, the Keystone XL pipeline, hydraulic fracturing, offshore drilling, or renewable energy, much of the U.S. policy dialogue about energy and climate change is deeply partisan. Republicans and Democrats debate individual issues in vitriolic sound bites that indicate minimal common ground. For example, officials favoring robust action on climate change are charged with engaging in a “War on Coal.” Those opposed are labeled “members of the Flat Earth Society.” Set against these dysfunctional climate and energy politics, how can progress be made? For people who accept the science of climate change, this has become a critical question. An emerging body of psychological research indicates that strategies attempting to persuade those with opposing views with additional scientific evidence have limited effectiveness. Providing more information does not change minds because (1) it does not take moral and cultural worldview differences into account, or (2) it is presented in ways that do not adequately acknowledge how people’s perceptions of the relatability and trustworthiness of communicators shape their acceptance of that information. This Article provides a novel analysis of how to make progress on energy and climate change issues by translating this emerging psychological research into a framework for action. It proposes two interconnected strategies—substantive and structural—for moving past imbedded partisanship and political dysfunction. Substantively, the Article argues for refocusing regulatory efforts on areas where a greater degree of consensus may be possible, such as economic development and disaster resilience. Structurally, it proposes a shift to arenas that are less gridlocked by energy partisanship than the legislative branch of the federal government, such as other branches of the federal government, state and local levels, and corporate and private sector actors. By drawing on case studies and empirical data, including interviews with key stakeholders, the Article illustrates possibilities for progress under this framework