Risk Aversion and Expected-Utility Theory: A Calibration Exercise

2006 ◽  
Author(s):  
Laura Schechter
Keyword(s):  
Risk Aversion ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory

Contrasting Rational and Psychological Analyses of Political Choice

1988 ◽  
Vol 82 (3) ◽  
pp. 719-736 ◽  
Author(s):  
George A. Quattrone ◽  
Amos Tversky
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Reference Point ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Risky Choice ◽  
Political Candidates ◽  
Risk Seeking ◽  
Psychological Analysis

We contrast the rational theory of choice in the form of expected utility theory with descriptive psychological analysis in the form of prospect theory, using problems involving the choice between political candidates and public referendum issues. The results showed that the assumptions underlying the classical theory of risky choice are systematically violated in the manner predicted by prospect theory. In particular, our respondents exhibited risk aversion in the domain of gains, risk seeking in the domain of losses, and a greater sensitivity to losses than to gains. This is consistent with the advantage of the incumbent under normal conditions and the potential advantage of the challenger in bad times. The results further show how a shift in the reference point could lead to reversals of preferences in the evaluation of political and economic options, contrary to the assumption of invariance. Finally, we contrast the normative and descriptive analyses of uncertainty in choice and address the rationality of voting.

scholarly journals Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show

2008 ◽  
Vol 98 (1) ◽  
pp. 38-71 ◽  
Author(s):  
Thierry Post ◽  
Martijn J van den Assem ◽  
Guido Baltussen ◽  
Richard H Thaler
Keyword(s):  
Decision Making ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Path Dependence ◽  
Expected Utility Theory ◽  
Decision Making Under Risk ◽  
Game Show ◽  
Dependent Choice

We examine the risky choices of contestants in the popular TV game show “Deal or No Deal” and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well defined, and when large real monetary amounts are at stake. (JEL D81)

scholarly journals WHEN GAMBLING IS NOT WINNING: EXPLORING OPTIMALITY OF VIX TRADING UNDER THE EXPECTED UTILITY THEORY

2019 ◽  
Vol 1 (1) ◽  
pp. 1-1 ◽  
Author(s):  
Anmar Al Wakil
Keyword(s):  
Risk Aversion ◽  
Portfolio Choice ◽  
Expected Utility ◽  
Risk Premium ◽  
Asset Management ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Insurance Premium ◽  
Ex Post ◽  
Vix Futures

Recently, financial innovations have given rise to complex derivatives within the asset management industry. Although traditional assets pay dividends or coupons, vIX futures contracts have been partly misunderstood by unsophisticated investors, as they only provide portfolio insurance against stock market crashes. Therefore, over the calmer period 2009-2014, the most traded vIX futures exchange-traded product lost practically all of its value, ruining unexperienced investors. hence, this paper investigates appropriateness of these complex derivatives with investor's risk aversion. We address portfolio-choice optimality under uncertainty, for overlay allocations composed of equities, bonds, and vIX futures. This paper proposes a non-trivial solution based on the expected utility theory to simulate investor's behavior with risk aversion. Furthermore, it derives an investor's surprise metric defined as a welfare criterion measure, and a modelimplied risk premium defined as the insurance premium investor pays ex post to hedge. Empirical results show investing in vIX futures significantly beats traditionally diversified portfolios, but they turn to be particularly inappropriate for risk-loving investors. From the asset management perspective, this paper has practical implications since it recommends pedagogical efforts to raise investors' awareness of overlay strategies.

scholarly journals On the futility of estimating utility functions: Why the parameters we measure are wrong, and why they do not generalize

2019 ◽  
Author(s):  
Neil Stewart ◽  
Emina Canic ◽  
Timothy L Mullett
Keyword(s):  
Parameter Estimation ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Utility Functions ◽  
Parameter Estimates ◽  
Risky Choices ◽  
Long Time

We have known for a long time that people’s risky choices depart systematically from expected utility theory,and also from related models like prospect theory. But it is still common to use expected utility theory orprospect theory to estimate parameters like risk aversion from sets of risky choices. We have also known fora long time that when parameters are estimated, a systematic departure between the model and the datacauses biased parameter estimates. Here we show how the bias in parameter estimation interacts with the setof choices presented to participants. We find that estimates of risk aversion vary greatly between choice setseven though no real differences in risk aversion exist. We find parameters do not generalise at all betweenchoice sets, even when the sets are random draws from a master choice set.

Sign in / Sign up

Export Citation Format

Share Document