Reading Flashcards
What explains the characteristic curvature of the value function and weighting function? (Tversky + Kahneman 1992)
Diminishing sensitivity and loss aversion
What is the valuation rule? (Tversky & Kahneman 1992)
A two part cumulative functional and the value is S-shaped and the weighting functions are inverse shaped
Downsides of cumulative functional (Tversky & Kahneman 1992)
Despite its greater generality, the cumulative functional is unlikely to be accurate in detail. We suspect that design weights may be sensitive to the formulation of the prospects, as well as to the number, the spacing and the level of outcomes
Certainty effect (Tversky & Kahneman 1979)
People underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This contributes to loss aversion
What are the carriers of value in prospect theory? (Tversky & Kahneman 1979)
The carriers of value are changes in wealth or welfare, rather than financial states
In EUT what does risk aversion derive from? (O’Donoghue & Summerville 2018)
In EUT, a person is risk averse if and only if the utility function over monetary wealth is concave. In other words, risk aversion derived from diminishing marginal utility for monetary wealth
What is an issue with the loss aversion model? (O’Donoghue & Somerville 2018)
There is no clear answer about what the reference point should be. T&K 1979 assume it is prior wealth but applications of loss aversion have often posited different reference points
Calibration problem (O’Donoghue & Somerville 2018)
EUT experiences calibration problem. This is where the model rules out seemingly plausible preferences due to a calibration problem in dealing with stakes of different sizes
From Starmer 2000 how does evidence match up to independence axiom?
Evidence indicates that actual choice behaviour may systematically violate the independence axiom. CCE and CRE are examples of this
Starmer 2000 why is it a worry that EUT isn’t perfect at predicting behaviour?
Because the errors are systematic
Starmer 2000 why does preference reversal occur?
Likely due to failures of transitivity and procedure invariance
Starmer 2000 what does generalised EUT assume of indifference curves?
Generalised EUT required indifference curves to be smooth but not necessarily linear
Starmer 2000 what is Chew & MacCrimmon’s 1979 weighted utility theory?
Preferences are represented by a function where u(.) and g(.) are two different functions assigning non zero weights to all consequences
What is betweenness? Starmer 2000
A crucial axiom in weighted utility theory that imposes linearity on indifference curves but is a weakened form of independence
What is a less appealing feature of the rank dependent model? Starmer 2000
A less appealing feature is that a small change in the value of some outcome of a prospect can have a dramatic effect on its decision weight if the change affects the rank order of consequence but a large change in value can have no effect on the decision weight if it doesn’t alter the rank
Describe regret theory Starmer 2000
In non transitive preference theory (regret theory), it is assumed that an individual compares the outcome within a given prospect giving rise to the possibility of disappointment when the outcome of a gamble compares unfavourably with what they might have had
If you want a preference theory consistent with the data what should you avoid? Starmer 2000
Avoid imposing generalised fanning out and imposing betweenness. Avoid imposing linear indifference curves
What did Thaler 1981 find out about average annual discount rates?
He asked subjects how much they would require in one month/ one year/ 10 years to make them indifferent to £15 now. Median responses imply average annual discount rates of 345% over 1 month, 120% over a year, and 19% over 10 years. Indicative of hyperbolic discounting
How does read 2001 offer to explain implicit discount rates decreasing with time horizon?
Sub additive discounting which means the total amount of discounting over a temporal interval increases as the interval is more finely partitioned
How are gains discounted compared to losses?
Gains are potentially discounted at a higher rate than losses. Thaler 1981 parking tickets
Anticipatory utility
People may derive pleasure not only from current consumption but also from anticipating future consumption. This means current instantaneous utility will depend positively on future consumption
Visceral influences
Hunger pain sexual desire
How well do people evaluate the effects of visceral influences?
People overestimate how long a hot state will last and underestimate how quickly you can turn from a cold state to a hot state (Loewenstein & O’Donoghue 1999)
Projection bias
People tend to underestimate the magnitude of the qualitative nature of their changing preferences
