Zvi Wiener

Stochastic Dominance and Prospect Dominance with Subjective Weighting Functions

Laboratory experiments with and without real money repeatedly reveal that even if all subjects observe the same pair of cumulative distributions F and G, they act as if they were other cumulative probability functions F* and G* different for different investors. Namely, the subjects assign (subjective) weights to the various probabilities. In their breakthrough article Kahneman and Tversky [1979] suggest that in making decisions under uncertainty, the subjects apply a monotonic transformation π(p) where p are the probabilities, and investors make decisions by comparing π(p) corresponding to the two distributions under consideration rather than by comparing the true probabilities, p, themselves.

Bargaining with an agenda

Gradual bargaining is represented by an agenda: a family of increasing sets of joint utilities, parameterized by time. A solution for gradual bargaining specifies an agreement at each time. We axiomatize an ordinal solution, i.e., one that is covariant with order-preserving transformations of utility. It can be viewed as the limit of step-by-step bargaining in which the agreement of the last negotiation becomes the disagreement point for the next. The stepwise agreements may follow the Nash solution, the Kalai–Smorodinsky solution or many others and still yield the ordinal solution in the limit.

On the Use of Numeraires in Option Pricing

This article discusses the underlying theory of the numeraire technique, and illustrates it with five pricing problems: pricing savings plans that offer a choice of interest rates; pricing convertible bonds; pricing employee stock ownership plans; pricing options whose strike price is in a currency different from the stock price; and pricing options whose strike price is correlated with the short-term interest rate.

Prospect theory and utility theory: Temporary versus permanent attitude toward risk

Prospect theory (PT), which relies on subjects’ behavior as observed in laboratory experiments, contradicts the behavior predicted by the Expected Utility (EU) paradigm. Having wealth of

Government Support of Investment Projects in the Private Sector: A Microeconomic Approach

100,000 or having wealth of

Stakeholders and the composition of the voting rights of the board of directors

90,000 and winning

Introduction to Var (Value-At-Risk)

10,000 in a lottery is the same by EU paradigm but not the same by Markowitz (1952) and by PT (1979) which emphasizes the importance of change of wealth rather than total wealth on welfare. In this study, we resolve this contradiction by introducing the concept of temporary attitude toward risk (TATR) and permanent attitude toward risk (PATR). Using these concepts, we build a model that merges both the PT and the EU paradigms. The TATR and PATR concepts explain recent experimental findings and the observed stock price overreaction. We show that a positive risk premium with decreasing absolute risk aversion (DARA) can be consistent with the S-shaped value function used in PT.

An investigation of cheapest to deliver on treasury bond futures contracts

We examine government decisions on subsidizing investments in the private sector and discriminating among firms in its support programs. By taxing corporate profits, the government may affect corporate investment decisions, causing firms to invest less than what would be socially optimal. Investments that are desirable from the standpoint of social welfare may be rejected by shareholders, which may ultimately lead to the collection of fewer taxes. We analyze the conditions for optimal subsidies for investments carried out by the private sector. We find that high-risk ventures that generate substantial spillover activity are prime candidates for government incentive schemes.

The estimation of nominal and real yield curves from government bonds in Israel

We propose a new approach to dynamic representation of different groups of stakeholders on the board of directors. This approach is based on a simple economic model of the firm, with an objective function to maximize its market value. We look at the marginal claim of each stakeholder on the assets of the firm. It divides the voting rights based on the change in value of each stakeholder with a one dollar change in the value of the firm as a whole. We translate these conditions to relative voting powers on the board. While there are many claims in the academic and popular literature on sharing voting rights on the board, our paper is the first to propose a quantitative dynamic model of the power sharing in the corporation.

Counterparty Risk in Exchange-TradedNotes (ETNs)

Modern financial theory is based on several important principles, two of which are no-arbitrage and risk aversion. The single major source of profit is risk. The expected return depends heavily on the level of risk of an investment. Although the idea of risk seems to be intuitively clear, it is difficult to formalize it. Several attempts to do so have been undertaken with various degree of success. There is an efficient way to quantify risk in almost every single market. However, each method is deeply associated with its specific market and can not be applied directly to other markets. Value-at-Risk (VaR) is an integrated way to deal with different markets and different risks and to combine all of the factors into a single number, which is a good indicator of the overall risk level.