Ulrich Schmidt | Christian-Albrechts-Universität zu Kiel (original) (raw)
Papers by Ulrich Schmidt
In the recent literature, several hypotheses have been put forward in order to explain the declin... more In the recent literature, several hypotheses have been put forward in order to explain the decline of contributions in repeated public good games. We present results of an experiment which allows to evaluate these hypotheses. The main characteristics of our experimental design are a variation of information feedback and an elicitation of individual beliefs about others' contributions. Altogether, our data support the hypothesis of conditional cooperation with a selfish bias.
We use a survey method designed to capture whether the consumption sharing ability of households ... more We use a survey method designed to capture whether the consumption sharing ability of households varies systematically at different levels of well being. Evidence from Cyprus reconfirms our previous results from other countries, that household consumption economies of scale increase as the living standard of a household increases.
This paper considers a new subjective approach to the construction of equivalence scales in which... more This paper considers a new subjective approach to the construction of equivalence scales in which different reference income instead of reference utility levels are presented to subjects. This approach has several advantages and is employed in an empirical study for different hypothetical household compositions. The first question analysed is whether equivalence scales depend on the chosen reference income level. In general, equivalence scales are either assumed to be constant irrespective of the reference income or a significant correlation is denied. Our empirical results show a significant negative correlation between reference income and scale values. Second, we analyse the question whether a significant correlation exists between the weights for children and the number of parents (one or two) living in the household. Although the only two studies concerning this question we are aware of postulate higher weights for children in a two parent household, our study implies the opposite result: The weights for children in a one parent family are significantly higher. Finally, based on our results, we fit a formula for the calculation of equivalence scales which incorporates both effects. extended this approach to hypothetical families. , on the other hand, specified income levels and asked for the corresponding utilities. 5 For a detailed critique of this approach cf.
A distinguishing feature among households is whether adult members work or not, since the occupat... more A distinguishing feature among households is whether adult members work or not, since the occupational status of adults affects their available time for home activities. Using a survey method in two countries, Belgium and Germany, we provide household incomes that retain the level of well-being across different family types, distinguished by family size and occupational status of adults. Our tests support that child care-time costs are important determinants of household well-being. Estimates of child costs relative to an adult are higher for households that are time-constrained (all adults in the household work). Moreover, we find supportive evidence for the hypothesis that, in two-adult households, there is a potential for within-household welfare gains from specialization in market-vs. domestic activities, especially child care.
Two conclusions can be drawn from the recent literature on decision making under risk.
Journal of Risk and Uncertainty
This paper experimentally investigates a preference condition for loss aversion in the framework ... more This paper experimentally investigates a preference condition for loss aversion in the framework of cumulative prospect theory (CPT). We propose the concepts of absolute and relative loss premiums in order to measure the extent of loss aversion and to derive notions of increasing, constant, and decreasing loss aversion. Only about 51% of all choices are loss averse. Thus, in only one of the 28 choice situations analyzed, loss neutrality, respectively loss seeking, can berejected in favour of loss aversion. However, due to the large extent of loss aversion revealed by the loss averse choices, the average loss premium is positive for most choice situations. Female subjects exhibit both a more frequent occurence and a larger extent of loss aversion. Additionally, we nd a systematic relationship between loss attitude and assessment probability, contradicting the separability between the value function and decision weights in CPT. JEL{Classi cation: C9, D8.
This paper presents a model for the "gambling e¤ect," i.e., the e¤ect that risky gambles are eval... more This paper presents a model for the "gambling e¤ect," i.e., the e¤ect that risky gambles are evaluated di¤erently than riskless outcomes due to an intrinsic utility (or disutility) of gambling. The model turns out to violate stochastic dominance and therefore its primary applications will be descriptive. It sheds new light on empirical observations of risk attitudes and provides new insights into the distinction between risky and riskless utility.
This study provides evidence from a questionnaire survey of fund managers. We find that the major... more This study provides evidence from a questionnaire survey of fund managers. We find that the majority of respondents rely on momentum, contrarian and buy-&-hold strategies to some degree. Although there were few applicants who exclusively rely on a single trading strategy, clear preferences emerged. All kinds of predetermined trading strategies are preferred by younger and less experienced professionals.
One possible conclusion from recent experimental research on decision making under risk is that o... more One possible conclusion from recent experimental research on decision making under risk is that observed behaviour can be reasonable accommodated by expected utility plus an error term. This conclusion implies that the violation rate of expected utility should decrease if errors are excluded. The present paper presents an experiment which investigates this implication. Indeed, the results show that the exclusion of errors leads to a significant reduction of the violation rate for most of the subjects and most of the choice problems under risk. However, it turns out that for decision problems under ambiguity the exclusion of errors in contrast increases the violation rate significantly. In this sense the Ellsberg paradox can be regarded as a more serious challenge of expected utility than the Allais paradox. More general, while expected utility plus error term may be regarded as a reasonable representation for choice under risk this does not seem to be true for ambiguous choice problems.
The security level models of and of Ja¤ray (1988) as well as the security and potential level mod... more The security level models of and of Ja¤ray (1988) as well as the security and potential level model of and Essid (1997) successfully accommodate classical Allais paradoxes while they o¤er an interesting explanation for their occurrence. However, experimental data suggest a systematic violation of these models when lotteries with low probabilities of bad or good outcomes are involved. In our opinion, one promising candidate for the explanation of these violations is the assumption of thresholds in the perception of security and potential levels. The present paper develops an axiomatic model that allows for such thresholds, so that the derived representation of preferences can accommodate the observed violations of the original security and potential level models.
This paper analyzes individual decision making under risk. It is assumed that an individual does ... more This paper analyzes individual decision making under risk. It is assumed that an individual does not have a preference relation on the set of risky lotteries. Instead, the primitive of choice is a choice probability that captures the likelihood of one lottery being chosen over the other. Choice probabilities have a stochastic utility representation if they can be written as a non-decreasing function of the difference in expected utilities of the lotteries. Choice probabilities admit a stochastic utility representation if and only if they are complete, strongly transitive, continuous, independent of common consequences and interchangeable. Axioms of stochastic utility are consistent with systematic violations of betweenness and a common ratio effect but not with a common consequence effect. Special cases of stochastic utility include the Fechner model of random errors, Luce choice model and a tremble model of Harless and Camerer (1994).
In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed... more In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where reference-dependence is derived from preference conditions and a unique reference point arises endogenously.
In the recent literature, several hypotheses have been put forward in order to explain the declin... more In the recent literature, several hypotheses have been put forward in order to explain the decline of contributions in repeated public good games. We present results of an experiment which allows to evaluate these hypotheses. The main characteristics of our experimental design are a variation of information feedback and an elicitation of individual beliefs about others' contributions. Altogether, our data support the hypothesis of conditional cooperation with a selfish bias.
We use a survey method designed to capture whether the consumption sharing ability of households ... more We use a survey method designed to capture whether the consumption sharing ability of households varies systematically at different levels of well being. Evidence from Cyprus reconfirms our previous results from other countries, that household consumption economies of scale increase as the living standard of a household increases.
This paper considers a new subjective approach to the construction of equivalence scales in which... more This paper considers a new subjective approach to the construction of equivalence scales in which different reference income instead of reference utility levels are presented to subjects. This approach has several advantages and is employed in an empirical study for different hypothetical household compositions. The first question analysed is whether equivalence scales depend on the chosen reference income level. In general, equivalence scales are either assumed to be constant irrespective of the reference income or a significant correlation is denied. Our empirical results show a significant negative correlation between reference income and scale values. Second, we analyse the question whether a significant correlation exists between the weights for children and the number of parents (one or two) living in the household. Although the only two studies concerning this question we are aware of postulate higher weights for children in a two parent household, our study implies the opposite result: The weights for children in a one parent family are significantly higher. Finally, based on our results, we fit a formula for the calculation of equivalence scales which incorporates both effects. extended this approach to hypothetical families. , on the other hand, specified income levels and asked for the corresponding utilities. 5 For a detailed critique of this approach cf.
A distinguishing feature among households is whether adult members work or not, since the occupat... more A distinguishing feature among households is whether adult members work or not, since the occupational status of adults affects their available time for home activities. Using a survey method in two countries, Belgium and Germany, we provide household incomes that retain the level of well-being across different family types, distinguished by family size and occupational status of adults. Our tests support that child care-time costs are important determinants of household well-being. Estimates of child costs relative to an adult are higher for households that are time-constrained (all adults in the household work). Moreover, we find supportive evidence for the hypothesis that, in two-adult households, there is a potential for within-household welfare gains from specialization in market-vs. domestic activities, especially child care.
Two conclusions can be drawn from the recent literature on decision making under risk.
Journal of Risk and Uncertainty
This paper experimentally investigates a preference condition for loss aversion in the framework ... more This paper experimentally investigates a preference condition for loss aversion in the framework of cumulative prospect theory (CPT). We propose the concepts of absolute and relative loss premiums in order to measure the extent of loss aversion and to derive notions of increasing, constant, and decreasing loss aversion. Only about 51% of all choices are loss averse. Thus, in only one of the 28 choice situations analyzed, loss neutrality, respectively loss seeking, can berejected in favour of loss aversion. However, due to the large extent of loss aversion revealed by the loss averse choices, the average loss premium is positive for most choice situations. Female subjects exhibit both a more frequent occurence and a larger extent of loss aversion. Additionally, we nd a systematic relationship between loss attitude and assessment probability, contradicting the separability between the value function and decision weights in CPT. JEL{Classi cation: C9, D8.
This paper presents a model for the "gambling e¤ect," i.e., the e¤ect that risky gambles are eval... more This paper presents a model for the "gambling e¤ect," i.e., the e¤ect that risky gambles are evaluated di¤erently than riskless outcomes due to an intrinsic utility (or disutility) of gambling. The model turns out to violate stochastic dominance and therefore its primary applications will be descriptive. It sheds new light on empirical observations of risk attitudes and provides new insights into the distinction between risky and riskless utility.
This study provides evidence from a questionnaire survey of fund managers. We find that the major... more This study provides evidence from a questionnaire survey of fund managers. We find that the majority of respondents rely on momentum, contrarian and buy-&-hold strategies to some degree. Although there were few applicants who exclusively rely on a single trading strategy, clear preferences emerged. All kinds of predetermined trading strategies are preferred by younger and less experienced professionals.
One possible conclusion from recent experimental research on decision making under risk is that o... more One possible conclusion from recent experimental research on decision making under risk is that observed behaviour can be reasonable accommodated by expected utility plus an error term. This conclusion implies that the violation rate of expected utility should decrease if errors are excluded. The present paper presents an experiment which investigates this implication. Indeed, the results show that the exclusion of errors leads to a significant reduction of the violation rate for most of the subjects and most of the choice problems under risk. However, it turns out that for decision problems under ambiguity the exclusion of errors in contrast increases the violation rate significantly. In this sense the Ellsberg paradox can be regarded as a more serious challenge of expected utility than the Allais paradox. More general, while expected utility plus error term may be regarded as a reasonable representation for choice under risk this does not seem to be true for ambiguous choice problems.
The security level models of and of Ja¤ray (1988) as well as the security and potential level mod... more The security level models of and of Ja¤ray (1988) as well as the security and potential level model of and Essid (1997) successfully accommodate classical Allais paradoxes while they o¤er an interesting explanation for their occurrence. However, experimental data suggest a systematic violation of these models when lotteries with low probabilities of bad or good outcomes are involved. In our opinion, one promising candidate for the explanation of these violations is the assumption of thresholds in the perception of security and potential levels. The present paper develops an axiomatic model that allows for such thresholds, so that the derived representation of preferences can accommodate the observed violations of the original security and potential level models.
This paper analyzes individual decision making under risk. It is assumed that an individual does ... more This paper analyzes individual decision making under risk. It is assumed that an individual does not have a preference relation on the set of risky lotteries. Instead, the primitive of choice is a choice probability that captures the likelihood of one lottery being chosen over the other. Choice probabilities have a stochastic utility representation if they can be written as a non-decreasing function of the difference in expected utilities of the lotteries. Choice probabilities admit a stochastic utility representation if and only if they are complete, strongly transitive, continuous, independent of common consequences and interchangeable. Axioms of stochastic utility are consistent with systematic violations of betweenness and a common ratio effect but not with a common consequence effect. Special cases of stochastic utility include the Fechner model of random errors, Luce choice model and a tremble model of Harless and Camerer (1994).
In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed... more In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where reference-dependence is derived from preference conditions and a unique reference point arises endogenously.