The complexity of the consumer problem

A literal interpretation of neo-classical consumer theory suggests that the consumer solves a very complex problem. In the presence of indivisible goods, the consumer problem is NP-Hard, and it appears unlikely that it can be optimally solved by a human. Two implications of this observation are that (i) households may imitate each other’s choices; (ii) households may adopt heuristics that give rise to the phenomenon of mental accounting.     

Trabajar o no trabajar: evolución del compromiso no económico con el empleo y sus determinantes

A partir de datos transversales relativos a Israel de 1981, 1993 y 2006, basados en respuestas a la pregunta de si se seguiría trabajando tras ganar la lotería, se investiga el compromiso no económico con el trabajo (NFEC), tratando de identificar las variables demográficas y las dimensiones del «significado del trabajo» que funcionan como predictores, sobre la base de estudios previos en todo el mundo. Se observa un marcado descenso del NFEC y un cambio en sus determinantes en el nuevo milenio. Los autores lo relacionan con la evolución económica y social reciente, tendiente a un mayor individualismo.     

Firm specific and macro herding by professional and amateur investors and their effects on market volatility

We find a herding tendency among both amateur and professional investors and conclude that the propensity to herd is lower in the professionals. These results are obtained both when we consider herding into individual stocks and herding into stocks in general. Herding depends on the firm’s systematic risk and size, and the professionals are less sensitive to these variables. The differences between the amateurs and the professionals may be attributable to the latter’s superior financial training. Most of the results are consistent with the theory that herding is information-based. We also find that the herding behavior of the two groups is a persistent phenomenon, and that it is positively and significantly correlated with stock market returns’ volatility. Finally, herding, mainly by amateurs, causes market volatility in the Granger causality sense.     

Incomplete risk sharing arrangements and the value of information

Summary. The paper constructs a theoretical framework in which the value of information in general equilibrium is determined by the interaction of two opposing mechanisms: first, more information about future random events leads to better individual decisions and, therefore, higher welfare. This is the ‘Blackwell effect’ where information has positive value. Second, more information in advance of trading limits the risk sharing opportunities in the economy and, therefore, reduces welfare. This is the ‘Hirshleifer effect’ where information has negative value. We demonstrate that in an economy with production information has positive value if the information refers to non-tradable risks; hence, such information does not destroy the Blackwell theorem. Information which refers to tradable risks may invalidate the Blackwell theorem if the consumers are highly risk averse. The critical level of relative risk aversion beyond which the value of information becomes negative is less than 0.5. Received: May 14, 2001; revised version: March 5, 2002     

Exclusive vs. independent agents: a separating equilibrium approach

We provide a separating equilibrium explanation for the existence of the independent insurance agent system despite the potentially higher costs of this system compared to those of the exclusive agents system (or direct underwriting). A model is developed assuming asymmetric information between insurers and insureds; the former do not know the riskiness of the latter. We also assume that the claims service provided by the independent agent system to its clients is superior to that offered by direct underwriting system, that is, insureds using the independent agent system are more likely to receive reimbursement of their claims. Competition compels the insurers to provide within their own system the best contract to the insured. It is shown that in equilibrium the safer insureds choose direct underwriting, whereas the riskier ones choose independent agents. The predictions of the model agree with previous research demonstrating that the independent agent system is costlier than direct underwriting. The present model suggests that this does not result from inefficiency but rather from self-selection. The empirical implication of this analysis is that, ceteris paribus, the incidence of claims made by clients of the independent agents system is higher than that of clients of direct underwriting. Implications for the coexistence of different distribution systems due to unbundling of services in other industries such as brokerage houses and the health care industry are discussed.     

Dynamics of inductive inference in a unified framework

We present a model of inductive inference that includes, as special cases, Bayesian reasoning, case-based reasoning, and rule-based reasoning. This unified framework allows us to examine how the various modes of inductive inference can be combined and how their relative weights change endogenously. For example, we establish conditions under which an agent who does not know the structure of the data generating process will decrease, over the course of her reasoning, the weight of credence put on Bayesian vs. non-Bayesian reasoning. We illustrate circumstances under which probabilistic models are used until an unexpected outcome occurs, whereupon the agent resorts to more basic reasoning techniques, such as case-based and rule-based reasoning, until enough data are gathered to formulate a new probabilistic model.     

On the theory of the competitive firm with a utility function defined on profits and regret

In this paper we analyze the optimal output determined by a competitive firm facing uncertain demand. We analyze the effect of introducing uncertainty and the effect of increasing uncertainty on the optimal output, under the assumption that the utility function of the firm depends both on profits and on regret. We show that if the firm is more risk averse to profits than to regret (in a sense described below), both effects tend to decrease the optimal output. Similar effects of introducing uncertainty and of increased uncertainty were previously shown by Sandmo (1971) to exist in the case where utility is defined on profits only. Thus, this paper provides conditions under which the above results hold true, even when utility is defined on regret and on profits.     

The value of information: The case of signal-dependent opportunity sets

We generalize the economic decision problem considered by Blackwell (1953) in which a decision-maker chooses an action after observing a signal correlated to the state of nature. Unlike Blackwell's case where the feasible set is fixed, in our framework the feasible set of actions depends on the signal and the information system. We argue that such a framework has more significance to economic models. As was demonstrated by Hirshleifer (1971) in such cases, contrary to Blackwell's well-known result, more information may be disadvantageous. We derive conditions for this general model which guarantee that more information is beneficial.