Search results

1 – 10 of 155
Article
Publication date: 1 July 2011

Wang Wen Hui

The purpose of this paper is to argue that Bernoulli's “utility function solution to the St Petersburg paradox” was wrong and to find a new method to solve the paradox.

Abstract

Purpose

The purpose of this paper is to argue that Bernoulli's “utility function solution to the St Petersburg paradox” was wrong and to find a new method to solve the paradox.

Design/methodology/approach

This goal is attained through two ways: using Bernoulli's and Kramer's utility function to construct new paradoxes; and designing and implementing a new St Petersburg game which does not carry the effect of diminishing marginal utility.

Findings

In this paper, the author finds that Bernoulli's “utility function solution to the St Petersburg paradox” was wrong, and also finds a new model to solve the paradox, which is also a brand‐new model of estimates under uncertainty.

Research limitations/implications

Bernoulli put forward the diminishing marginal utility of currency and thus accordingly provided the utility function solution to solve the paradox. This paper indicates that the Bernoulli's utility function solution does not work. Thus, further research needs to be taken in several aspects: is the diminishing marginal utility of currency tenable? Does the marginal utility of currency decrease monotonically? Are concave utility functions represented by negative index functions which are widely used in theoretical study reasonable?

Practical implications

The paper proposes a brand‐new possible research idea and direction for economic theoretical researches based on uncertainty.

Originality/value

This paper proved the untenability of the utility function solution to solve the St Petersburg paradox for the first time and proposed the pioneering “risk adjustment model” of estimates under uncertainty.

Details

China Finance Review International, vol. 1 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

Book part
Publication date: 3 June 2008

James C. Cox and Vjollca Sadiraj

Much of the literature on theories of decision making under risk has emphasized differences between theories. One enduring theme has been the attempt to develop a…

Abstract

Much of the literature on theories of decision making under risk has emphasized differences between theories. One enduring theme has been the attempt to develop a distinction between “normative” and “descriptive” theories of choice. Bernoulli (1738) introduced log utility because expected value theory was alleged to have descriptively incorrect predictions for behavior in St. Petersburg games. Much later, Kahneman and Tversky (1979) introduced prospect theory because of the alleged descriptive failure of expected utility (EU) theory (von Neumann & Morgenstern, 1947).

Details

Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

Article
Publication date: 1 March 2003

MICHAEL R. POWERS

Events surrounding September 11, 2001, have motivated increasing interest in identifying, assessing, and managing the risk of “extreme events.” This article introduces a…

Abstract

Events surrounding September 11, 2001, have motivated increasing interest in identifying, assessing, and managing the risk of “extreme events.” This article introduces a new mathematical framework for the risk management of extreme event risk. In the article, the author proposes criteria based on “higher” (the third and fourth) moments that dominate variance (the second moment) in explaining the economics of insurance and reinsurance. Economic and financial implications are then applied to the underwriting and investment activities of insurers and reinsurers.

Details

The Journal of Risk Finance, vol. 4 no. 4
Type: Research Article
ISSN: 1526-5943

Article
Publication date: 6 March 2017

Doraid Dalalah and Wasfi Al-Rawabdeh

The purpose of this paper is to benchmark alternatives of decision problems that include risk and uncertainty considering different risk attitudes via a new data…

Abstract

Purpose

The purpose of this paper is to benchmark alternatives of decision problems that include risk and uncertainty considering different risk attitudes via a new data envelopment analysis (DEA) decision model.

Design/methodology/approach

A new utility function of strict bounds is applied in a data envelopment model to evaluate all possible stochastic alternatives (i.e. gambles). The amount of risk in the alternatives is measured by a newly introduced risk ratio (RR). Each alternative is considered as a decision making unit (DMU). The alternatives efficiency frontier is found via linear optimization of the DEA model.

Findings

In contrast to literature studies of binary decision alternatives, here, benchmarking is conducted to evaluate multiple decision alternatives with unbounded utility of the payoffs along with a new DEA decision model. Different surveys and studies have been used to validate the model. DEA could demonstrate the ability to uncover relationships that remain hidden for other methodologies. The resulting rankings remarkably conform to those elicited by subjects.

Social implications

Individuals of different wealth backgrounds evaluate risky decision problems differently.

Originality/value

The paper contributes to the existing research by benchmarking multiple alternatives as compared to the literature research which usually assesses binary problems. Instead of using explicit utilities, the model implements the efficiencies along with a new utility function and a new RR. The introduction of DEA to such a decision field is found to be successful in benchmarking numerous alternatives under different risk attitudes.

Details

Benchmarking: An International Journal, vol. 24 no. 2
Type: Research Article
ISSN: 1463-5771

Keywords

Article
Publication date: 1 May 1993

S.M. Khalid Nainar and Mohamed Shehata

The dominant theory of individual decision making under uncertainty is the von Neumann and Morgenstern's expected utility model (EUM). Although, this model has gained its…

Abstract

The dominant theory of individual decision making under uncertainty is the von Neumann and Morgenstern's expected utility model (EUM). Although, this model has gained its popularity from its ability to explain a wide range of attitudes toward risk, empirical evidence over the last three decades has documented paradoxical behavior that is inconsistent with the EUM model. The present study examines in an experimental setting individuals' inconsistent behavior in choosing between two pairs of lotteries known as the Allais paradox. This study extends previous literature on money gamble situations by conducting a series of experiments to test expected utility behavior on auditing student subjects in pure money and audit settings. Two variants of audit settings are examined: overall audit plan case and audit procedure evaluation of internal control case.

Details

Managerial Finance, vol. 19 no. 5
Type: Research Article
ISSN: 0307-4358

Book part
Publication date: 16 November 2009

Giandomenica Becchio

Menger disagreed with this view for various reasons. Also, the subjective expectation is infinite. There are many cases where man's behaviour fails to conform to…

Abstract

Menger disagreed with this view for various reasons. Also, the subjective expectation is infinite. There are many cases where man's behaviour fails to conform to mathematical expectations: games in which a player can win only one very large amount with a very small probability or games offering a single moderate amount with a very high probability. Furthermore, we can always find a sequence of payoffs x1, x2, x3,…, which yield infinite expected value, and then propose, say, that u(xn)=2n, so that expected utility is also infinite. Menger therefore proposed that utility must also be bounded above for paradoxes of this type to be resolved.

Details

Unexplored Dimensions: Karl Mengeron Economics and Philosophy (1923–1938)
Type: Book
ISBN: 978-1-84855-998-1

Article
Publication date: 1 January 1985

STEPHEN SYKES

The market value of any property investment will tend to deteriorate over time when compared to similar modern properties if monies are not periodically expended to…

Abstract

The market value of any property investment will tend to deteriorate over time when compared to similar modern properties if monies are not periodically expended to mitigate the effects of obsolescence. This paper examines the relationship between the initial yield of a property at purchase and the rate of future rental value growth necessary to achieve a criterion rate of return on the investment. Traditionally in calculations of the future rental growth rate required to justify an initial investment yield (when compared, say, to the rental shown by gilt‐edged stocks) the simplistic view is taken that following purchase no further expenditure is anticipated. However, if a property is to maintain its original market appeal (or adapt to evolving circumstances), capital must from time‐to‐time be injected for the purposes of refurbishment. Thus, any analytical model which ignores this inevitable expenditure, but nevertheless assumes a constant rate of long‐term future rental growth, is quite unrealistic. A Refurbishment‐Rental Growth Model is derived which allows the introduction of regular future capital expenditure both in terms of magnitude and frequency. Various examples are illustrated of the effect which such expenditure may have in necessarily increasing the required future rental growth for a property investment in order to achieve an anticipated level of return.

Details

Journal of Valuation, vol. 3 no. 1
Type: Research Article
ISSN: 0263-7480

Book part
Publication date: 16 November 2009

Giandomenica Becchio

§ 1. My presentation to the Circle. When I presented my theory to the Circle, I found a mixed reception. Schlick, however, slightly shook his head, the mock-smile appeared…

Abstract

§ 1. My presentation to the Circle. When I presented my theory to the Circle, I found a mixed reception. Schlick, however, slightly shook his head, the mock-smile appeared on his face, and he tried to exchange glances. Only Waismann responded. Kaufmann was too loyal a friend to openly go against me even though he strongly felt that I was wrong. And Carnap was in deep thought.

Details

Unexplored Dimensions: Karl Mengeron Economics and Philosophy (1923–1938)
Type: Book
ISBN: 978-1-84855-998-1

Article
Publication date: 1 January 2004

Shu LI

A weighting or a rank‐dependent weighting function was used by revamped models of risky choice to explain that Allais Paradox arises because people behave so as to…

Abstract

A weighting or a rank‐dependent weighting function was used by revamped models of risky choice to explain that Allais Paradox arises because people behave so as to maximize overall value rather than EU. The risky choice behavior was, however, simply seen by the equate‐to‐differentiate model as a choice between the best possible outcomes or a choice between the worst possible outcomes. A “judging” task was designed to examine whether the knowledge of paired outcomes will permit prediction of preference. It was shown that the observed choices could be better accounted for by the equate‐to‐differentiate approach revealed by the judging data.

Details

Humanomics, vol. 20 no. 1
Type: Research Article
ISSN: 0828-8666

Article
Publication date: 12 December 2017

Xiaotian Liu, Huayue Zhang and Shengmin Zhao

The prospect theory is potentially an essential ingredient in modeling the disposition effect. However, many scholars have tried to explain the disposition effect with the…

Abstract

Purpose

The prospect theory is potentially an essential ingredient in modeling the disposition effect. However, many scholars have tried to explain the disposition effect with the help of prospect theory and they came to opposite conclusions. The purpose of this paper is to examine the impact of value function of the prospect theory on predicting the disposition effect.

Design/methodology/approach

Lagrange multiplier optimization and dynamic programming method are used to solve the representative investor’s optimal portfolio choice problem. Furthermore, numerical simulation is used to compare the prediction ability of different types of value function.

Findings

The authors support that the value function has a crucial role in predicting the disposition effect with prospect theory, i.e. the curvature and boundedness of the value function may influence the performance of applying the prospect theory in the disposition effect. They conclude that a piecewise negative exponential value function can predict the disposition effect, while others like the piecewise power value function may not.

Originality/value

Extant literature about modeling the disposition effect with the prospect theory mostly focus on the time when gain-loss utility occurs or the selection of reference point. This paper based on the value function properties provides a new perspective in analyzing the crucial role that value function has in predicting financial market anomalies.

Details

China Finance Review International, vol. 8 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

1 – 10 of 155