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

Balcombe, K. and Fraser, I. (2015) Parametric preference functionals under risk in the gain domain: a Bayesian analysis. Journal of Risk and Uncertainty, 50 (2). pp. 161-187. ISSN 0895-5646 doi: 10.1007/s11166-015-9213-8

Abstract/Summary

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: the differences in utilities, the differences in certainty equivalents and contextualutility. Overall, the"bestmodel", which is conditional on the form of heterogeneity is a form of Rank Dependent Utility or Prospect Theory that cap tures the majority of behaviour at both 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, previously examined within a deterministic setting, is estimated within a stochastic framework, and allowing for endogenous thresholds does improve model performance although it does not compete well with the other specications considered.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/38677
Identification Number/DOI	10.1007/s11166-015-9213-8
Refereed	Yes
Divisions	Life Sciences > School of Agriculture, Policy and Development > Department of Agri-Food Economics & Marketing
Publisher	Springer
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