A Reason for Sophisticated Investors not to seize Arbitrage Opportunities in Markets without Frictions

An example shows that for sophisticated consumers with changing preferences it can be perfectly rational not to seize arbitrage opportunities in markets without frictions.financial economics and financial management ;

The Hyperbolic Factor: a Measure of Decreasing Impatience

Many studies have found that discounting is hyperbolic rather than constant. Hyperbolicdiscounting is becoming increasingly popular in economic applications. Most studies thatprovide evidence in favor of hyperbolic discounting either are merely qualitative or theydepend on assumptions about, or parametric fittings of, utility functions. This paper provides a quantitative measure for the degree of deviation from stationarity that can overcome the problems mentioned. This measure, the hyperbolic factor, can easily be calculated from data and does not require knowledge of the utility function. Moreover, it provides simple preference foundations of the most popular discount functions. Thus, the hyperbolic factor provides an easy tool for theoretical preference foundations, critical empirical tests, and quantitative measurements of hyperbolic discounting.Economics ;

On the Completeness of Complete Markets

We reconsider the allocational invariance of equilibria to different formulations of market completeness. We identify the so-far neglected assumption of sophisticated behavior as crucial to this result. The paper studies three market structures. First, the Arrow-Debreu setting is considered. Second, sequentially complete markets are analyzed, where goods on the spot markets and all contingent one-period ahead commodities can be traded in every state. Finally, complete markets are analyzed, where all possible contingent commodities can be traded at every state. Preferences may be time-consistent or time-inconsistent. A distinction is made between naïve and sophisticated behavior. For economies with time-inconsistent preferences, Arrow-Debreu equilibria are not related to either sequentially complete equilibria or complete equilibria. It does hold that every equilibrium consumption that can be attained in sequentially complete markets, can also be attained in complete markets. An example shows that the converse is not true for naïve economies. Finally, when preferences are restricted to be time-consistent and households are sophisticated, the three market structures yield the same equilibrium consumption. Surprisingly, for naïve households, this result is not true, even when preferences are time-consistent.microeconomics ;

Intertemporal Correlation Aversion—A Model-Free Measurement

Decisions with risky consequences at multiple points in time are driven not only by risk attitudes and time preferences but also by attitudes toward intertemporal correlation (i.e., the correlation between outcomes at different points in time). This paper proposes a model-free method to measure degrees of intertemporal correlation aversion. We disentangle attitudes toward positive and negative intertemporal correlation, which can differ if expected intertemporal utility is violated. In an experiment, subjects on average exhibited correlation aversion both for lotteries with positive correlation and for lotteries with negative correlation. That is, they disliked positive correlations and liked negative correlations. At the individual level, we found heterogeneity and remarkably, many subjects being insensitive to intertemporal correlations. Moreover, for most subjects, expected intertemporal utility was violated because attitudes toward positive and negative correlation differed.</p

Time-inconsistent Preferences in a General Equilibrium Model

This paper introduces time-inconsistent preferences in a multi-commodity general equilibrium framework with incomplete markets. The standard concept of competitive equilibrium is extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naïve. This paper presents competitive equilibrium notions for economies with naïve agents and economies with sophisticated agents and provides assumptions under which both types of equilibria exist. Surprisingly, the set of naïve equilibria of societies populated by time-consistent households is not allocationally equivalent to the set of competitive equilibria. For sophisticated equilibria, the equivalence holds. Time-inconsistency also raises conceptual issues about the appropriate concept of efficiency. Choices have to be made concerning the incorporation of future preferences and the appropriate instruments to create Pareto improvements. For both naïve and sophisticated societies, we present four possible efficiency concepts. Suitable conditions are specified for which both naïve and sophisticated equilibria satisfy appropriate efficiency concepts.microeconomics ;

Reducing socioeconomic health inequalities?:A questionnaire study of majorization and invariance conditions

We study the appeal of basic preference conditions that underpin health inequality indices, including the widely used concentration index. We did a lab experiment in which 349 respondents had to choose repeatedly between two policies that generated a distribution of income and health among five groups in society. We found stronger support for preference conditions that focus on inequality in the marginal distribution of health (and income) than for preference conditions that favor reduced correlation between both dimensions. Respondents’ choices were more in line with the principle of income related health transfers when policies did not affect the ranking of groups in terms of health. Respondents also expressed more concern about the correlation between income and health when health was expressed as a shortfall rather than an attainment. Support for the preference conditions was unaffected when all groups in society experienced the same absolute or relative health change

Comprehensive Evaluation of the Behavioral Insights Group Rotterdam

Behavioral insights teams (BITs) employ behavioral experts and policy professionals to collaboratively improve public policy. Most evaluations of BITs focus on the interventions that BITs develop, but not the functioning of BITs. Here, we report the first comprehensive evaluation of a BIT, the Behavioral Insights Group Rotterdam. We investigate how its resources were used, for what activities, with what outputs, and to which effects. Using quantitative and qualitative methods, we derive nine propositions to describe and improve the integration of behavioral insights into public policy and administration.</p