scholarly journals Stocks as Lotteries: The Implications of Probability Weighting for Security Prices

2008 ◽  
Vol 98 (5) ◽  
pp. 2066-2100 ◽  
Author(s):  
Nicholas Barberis ◽  
Ming Huang
Keyword(s):  
Asset Pricing ◽  
Prospect Theory ◽  
Expected Utility ◽  
Cumulative Prospect Theory ◽  
Excess Return ◽  
Probability Weighting ◽  
Utility Model ◽  
Security Prices ◽  
Global Optima ◽  
Expected Utility Model

We study the asset pricing implications of Tversky and Kahneman's (1992) cumulative prospect theory, with a particular focus on its probability weighting component. Our main result, derived from a novel equilibrium with nonunique global optima, is that, in contrast to the prediction of a standard expected utility model, a security's own skewness can be priced: a positively skewed security can be “overpriced” and can earn a negative average excess return. We argue that our analysis offers a unifying way of thinking about a number of seemingly unrelated financial phenomena. (JEL D81, G11, G12)

Competition and Monopoly in the Market for Pari-mutuel Bets - a theoretical Approach

2013 ◽  
Vol 2 (2) ◽  
pp. 61-78
Author(s):  
Herbert Walther
Keyword(s):  
Expected Utility ◽  
Theoretical Approach ◽  
Prediction Markets ◽  
Probability Weighting ◽  
Utility Model ◽  
State Dependent ◽  
Expected Utility Model

An intertemporal state dependent expected utility model (generating S-shaped probability weighting by incorporating anticipated flows of utility from elation and disappointment) is used as a framework for analyzing the demand for various gambles. The analysis is extended to compare pari-mutuel bets under competitive and monopolistic conditions. The following conclusions can be drawn: (1) A monopoly fosters the `skeweness' of the pari-mutual bet: In equilibrium, the wager and the demand for probability to win are lower, while the wager per unit of probability to win and the prize are higher. (3) If prize expectations are endogenous, rollovers might be a necessary device to prevent instability. (4) Rational gamblers will be indifferent between `wager tax' and `bank holder' type methods of raising monopoly profits.I am grateful for helpful comments received from the participants at the `Conference on Gambling and Prediction Markets', organized by `Economica' and held at UCLA Riverside (20.-22 May 2007).

scholarly journals Cumulative Prospect Theory Version with Fuzzy Values of Outcome Estimates

Risks ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 72
Author(s):  
Oleg Uzhga-Rebrov ◽  
Peter Grabusts
Keyword(s):  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Cumulative Prospect Theory ◽  
Development History ◽  
Decisions Under Risk ◽  
History Of ◽  
Main Factors ◽  
Theoretical Foundations

Choosing solutions under risk and uncertainty requires the consideration of several factors. One of the main factors in choosing a solution is modeling the decision maker’s attitude to risk. The expected utility theory was the first approach that allowed to correctly model various nuances of the attitude to risk. Further research in this area has led to the emergence of even more effective approaches to solving this problem. Currently, the most developed theory of choice with respect to decisions under risk conditions is the cumulative prospect theory. This paper presents the development history of various extensions of the original expected utility theory, and the analysis of the main properties of the cumulative prospect theory. The main result of this work is a fuzzy version of the prospect theory, which allows handling fuzzy values of the decisions (prospects). The paper presents the theoretical foundations of the proposed version, an illustrative practical example, and conclusions based on the results obtained.

The Expected Utility of Insurance

2019 ◽  
pp. 8-47
Author(s):  
Brad Epperly
Keyword(s):  
Expected Utility ◽  
Judicial Independence ◽  
Utility Model ◽  
Personal Security ◽  
Power Means ◽  
Democratic Regimes ◽  
The Future ◽  
Autocratic Regimes ◽  
Expected Utility Model

This chapter offers a new version of popular “insurance” models of judicial independence, in which the competitiveness of the electoral arena induces leaders to prefer more independent courts, as a means of offering policy and personal security if they lose power. That is, paying the “premium” of increased constraints on behavior imposed by independent courts now for the insurance of protection in the future if out of office. The crux of the argument is that the risks associated with losing power in autocratic regimes are greater than in democracies, and therefore competition should be more salient in dictatorships than democracies. The stakes are higher because autocratic power means access to wealth and state resources in a way rarely equaled in democratic regimes, and more importantly the likelihood of being punished after leaving office is greater for former autocrats. Judiciaries exercising greater independence, however, can minimize the risks of being a former leader, and the chapter leverages this finding to develop an expected utility model, the empirical implication of which is higher salience of competition—when present—in autocracies. Unlike previous theories of how competition affects independence, this model integrates both the likelihood of losing office and the risks associated with such an outcome, and thus allows us to examine the phenomena across the democracy/dictatorship divide.

Sign in / Sign up

Export Citation Format

Share Document