William S. Neilson

A Further Examination of Cumulative Prospect Theory Parameterizations

Recent experimental studies have focused on fitting parameterized functional forms to cumulative prospect theorys weighting function. This paper examines the behavioral implications of the functional forms and the estimated parameters. We find that none of the parameterizations can simultaneously account for gambling on unlikely gains and the Allais paradox behavior or other strong choice patterns from experiments. Parameter estimates that lead to reasonable amounts of insurance and gambling behavior tend to also generate large risk premia. Taken as a whole, the analysis suggests that the functional forms proposed in the literature are not suitable for generalization to applied settings.

Higher-order generalizations of Arrow-Pratt and Ross risk aversion: A comparative statics approach

Abstract We analyze comparative risk aversion in a new way, through a comparative statics problem in which, for a cost, agents can shift from an initial probability distribution toward a preferred distribution. The Ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary, and the Arrow–Pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean-preserving spread and the cost is a utility cost. Higher-order increases in risk lead to higher-order generalizations, and the comparative statics method yields a unified approach to the problem of comparative risk attitudes.

Piece-Rate Contracts for Other-Regarding Workers

When workers are paid with piece rates, inequality arises naturally. We consider workers who care about income comparisons and are either status seeking or inequality averse. We identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise, and also circumstances under which workers’ inequality attitudes lead firms to set lower piece rates than they would otherwise. The key behavioral assumption for both of these results to hold when workers are identical is behindness aversion, the property that changes in inequality matter more to the worker when he is behind than when he is ahead. (JEL D01, J33, M52)

Comparative Risk Sensitivity with Reference-Dependent Preferences

Experimental evidence suggests that individuals are risk averse over gains and risk seeking over losses (i.e., they have S-shaped utility functions in an expected utility setting) and that they are loss averse. Furthermore, the evidence leads to a single definition of S-shaped utility, but it has led to several alternative specifications of loss aversion. This paper characterizes the relations “more S-shaped than” and “more loss averse than” for a utility function, and in so doing arrives at a new definition of loss aversion based on average instead of marginal utility.

On criminals' risk attitudes

Abstract If criminals are expected utility maximizers and more sensitive to changes in the certainty than the severity of punishment, they must be risk preferrers. We show that risk aversion is not ruled out if the expected utility hypothesis is weakened.

The Ross characterization of risk aversion: strengthening and extension

This paper offers an interpretive comparison of the Arrow-Pratt and Ross characterizations of comparative risk aversion for expected utility maximizers. The tools used in this comparison are then applied to obtain a strengthening of the Ross cha racterization. This strengthened result is in turn extended to the ca se of general, smooth, nonexpected utility preferences over probabili ty distributions. Copyright 1987 by The Econometric Society.

Bilateral Most-Favored-Customer Pricing and Collusion

In a two-period differentiated products duopoly model, most-favored-customer (MFC) pricing policies allow firms to commit to prices above the Bertrand prices. It is shown here, however, that unless a restrictive and unappealing assumption is made about demand, there is no equilibrium in which both firms adopt MFC policies. The restrictive assumption is that at least one firms demand is more responsive to changes in its opponents price than to changes in its own price; otherwise, firms have an incentive to deviate from a greater-than-Bertrand price in the first period.

Some mixed results on boundary effects

Abstract Recent experimental evidence suggests that expected utility theory performs well when all lotteries have the same number of probable outcomes. A straightforward model designed to accommodate this evidence also allows Allais paradox behavior but predicts violations of stochastic dominance preference.

A mixed fan hypothesis and its implications for behavior toward risk

In order to accommodate recent experimental evidence which questions the validity of the fanning out hypothesis, a mixed fan hypothesis is proposed. The hypothesis combines fanning out for the less-preferred region of probability triangles with fanning in for the more preferred region, and is defined over general probability spaces. The relevance of fanning hypotheses for economic analysis is illustrated with an asset demand example, and a new method for testing for fanning behavior is proposed.

A theory of kindness, reluctance, and shame for social preferences

Recent experimental evidence from dictator games suggests that proposers take money from receivers when taking is an option, and that many proposers are reluctant to play the game. This paper proposes a behavioral model with two components: a choice correspondence that depends on the endowed allocation and the menu of allocations available, and a preference ordering over endowment/menu pairs. The choice correspondence governs behavior when the proposer actually plays a game, and the preference ordering governs the proposers willingness to play a particular game. The model is then used to characterize notions of proposer kindness, reluctance, and shame.