Parametric preference functionals under risk in the gain domain: A Bayesian analysis

Kelvin Balcombe and Iain Fraser

Journal of Risk and Uncertainty, 2015, vol. 50, issue 2, 187 pages

Abstract: The performance of rank dependent preference functionals under risk is comprehensively evaluated using Bayesian model averaging. Model comparisons are made at three levels of heterogeneity plus three ways of linking deterministic and stochastic models: differences in utilities, differences in certainty equivalents and contextual utility. Overall, the “best model”, which is conditional on the form of heterogeneity, is a form of Rank Dependent Utility or Prospect Theory that captures most behaviour at the representative agent and individual level. However, the curvature of the probability weighting function for many individuals is S-shaped, or ostensibly concave or convex rather than the inverse S-shape commonly employed. Also contextual utility is broadly supported across all levels of heterogeneity. Finally, the Priority Heuristic model is estimated within a stochastic framework, and allowing for endogenous thresholds does improve model performance although it does not compete well with the other specifications considered. Copyright Springer Science+Business Media New York 2015

Keywords: Risk; Prospect theory; Rank dependent utility; Bayesian model averaging; Contextual utility; C11; C52; D81 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (21)

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DOI: 10.1007/s11166-015-9213-8

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