There is a long standing debate about whether or not risk aversion under an expected utility framework may be considered the main source of overbidding in a first-price independent private values auction. As an alternative, we adopt a non-expected utility framework, and identify an interpretable property on the probability weighting function (PWF) which always induces overbidding. This property...

This paper studies the design of unemployment insurance when neither the searching effort nor the savings of an unemployed agent can be monitored. If the principal could monitor the savings, the optimal policy would leave the agent savings-constrained. With a constant absolute risk-aversion (CARA) utility function, we obtain a closed form solution of the optimal contract. Under the optimal cont...

As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T : Previous work on bond allocation requires a specific model for equities, the term structure, and the investor’s utility function. In contrast, the only substantive assumption required for the analysis ...

This paper presents an equilibrium model of the term structure of interest rates when investors have heterogeneous preferences. The basic model considers a pure exchange economy of two classes of investors with different (but constant) relative risk-aversion and gives closed-form solutions to bond prices. We sue the model to examine the effect of preference heterogeneity on the behavior of bond...

When attempting to draw a ball of a specified color either from an urn containing 50 red balls and 50 black balls or from an urn containing an unknown ratio of 100 red and black balls, a majority of decision makers prefer the known-risk urn, and this ambiguity aversion effect violates expected utility theory. In an experimental investigation of the effect of urn size on ambiguity aversion, 149 ...

Quantitative analysis of football play calling suggests that NFL coaches do not choose their strategies optimally. They tend to be overly cautious. One possible explanation for this finding is that NFL coaches are averse to risk and loss. We propose a prospect theory based model of coaches' utility and estimate the model's parameters using kickoff data from the 2009 NFL season. Using an outcome...

We conduct a controlled laboratory experiment where subjects dynamically choose their portfolio allocation between a safe and a risky asset. We first derive analytically the optimal allocation of an expected utility maximizer with HARA utility function. We then fit the experimental choices to this model to assess the risk attitude of our subjects. Despite the substantial heterogeneity across su...

This paper reviews recent advances in the modelling of hedonic utility and the measurement of its physiological correlates. The paper also argues that incorporating hedonic experiences can enrich economic models. An example of such an application — a principal–agent model with moral hazard — is presented and thoroughly analyzed. Its implications are then compared with the structure of incentive...

We focus on automatic strategies to optimize life cycle savings and investment. Classical optimal savings theory establishes that, given the level of risk aversion, a saver would keep the same relative amount invested in risky assets at any given time. We show that, when optimizing lifecycle investment, performance and risk assessment have to take into account the investor's risk aversion and t...

In cumulative prospect theory models, different behavior concerning gains and losses is permitted. For gains different decision weights are assigned than for losses, and the shape of utility can reveal loss aversion. Decision analyses concentrate on both, the capacities, which determine the decision weights, and the nature of utility. This paper focuses on linear/exponential, power and multilin...