Discount rates,social judgments,individuals’ risk preferences,and uncertainty

The choice of the proper discount rate is important in the analysis of projects whose costs and benefits extend into the future, a particularly striking feature of policies directed at climate change. Much of the literature, including prominent work by Arrow et al. (1996), Stern (2007, 2008), and Dasgupta (2008), employs a reduced-form approach that conflates social value judgments and individuals’ risk preferences, the latter raising an empirical question about choices under uncertainty rather than a matter for ethical reflection. This article offers a simple, explicit decomposition that clarifies the distinction, reveals unappreciated difficulties with the reduced-form approach, and relates them to the literature. In addition, it explores how significant uncertainty about future consumption, another central factor in climate policy assessment, raises further complications regarding the relationship between social judgments and individuals’ risk preferences.     

Noise and bias in eliciting preferences

In the context of eliciting preferences for decision making under risk, we analyse the features of four different elicitation methods—pairwise choice, willingness-to-pay, willingness-to-accept, and the Becker-DeGroot-Marschak mechanism—and estimate noise, bias and risk attitudes for two different preference functionals, Expected Utility and Rank-Dependent Expected Utility. It is well-known that methods differ in terms of the bias in the elicitation; it is rather less well-known that methods differ in terms of their noisiness. It has also been reported that risk attitudes are not stable across different elicitation methods. Our results suggest that elicited preferences should only be used in the context in which they were elicited, and the bias in the certainty-equivalent methods should be kept in mind when making predictions based on the elicited preferences. Moreover, conclusions should be moderated to take into account the various methods’ noise, which is generally lowest in the case of pairwise choice.     

Common genetic effects on risk-taking preferences and choices

Although prior research has shown that risk-taking preferences and choices are correlated across many domains, there is a dearth of research investigating whether these correlations are primarily the result of genetic or environmental factors. We examine the extent to which common genetic factors account for the association between general risk-taking preferences and domain-specific risk-taking preferences, and between general risk-taking preferences and risk taking choices in financial investments, stock market participation and business formation. Using data from 1898 monozygotic (MZ) and 1344 same-sex dizygotic (DZ) twins, we find that general risk-taking shares a common genetic component with domain-specific risk-taking preferences and risk-taking choices.

     

Nontransitive preferences in decision theory

Intransitive preferences have been a topic of curiosity, study, and debate over the past 40 years. Many economists and decision theorists insist on transitivity as the cornerstone of rational choice, and even in behavioral decision theory intransitivities are often attributed to faulty experiments, random or sloppy choices, poor judgment, or unexamined biases. But others see intransitive preferences as potential truths of reasoned comparisons and propose representations of preferences that accommodate intransitivities. This article offers a partial survey of models for intransitive preferences in a variety of decisional contexts. These include economic consumer theory, multiattribute utility theory, game theory, preference between time streams, and decision making under risk and uncertainty. The survey is preceded by a discussion of issues that bear on the relevance and reasonableness of intransitivity.     

Eliciting risk preferences: When is simple better?

We study the estimation of risk preferences with experimental data and focus on the trade-offs when choosing between two different elicitation methods that have different degrees of difficulty for subjects. We analyze how and when a simpler, but coarser, elicitation method may be preferred to the more complex, but finer, one. Results indicate that the more complex measure has overall superior predictive accuracy, but its downside is that subjects exhibit noisier behavior. Our main result is that subjects’ numerical skills can help better assess this tradeoff: the simpler task may be preferred for subjects who exhibit low numeracy, as it generates less noisy behavior but similar predictive accuracy. For subjects with higher numerical skills, the greater predictive accuracy of the more complex task more than outweighs the larger noise. We also explore preference heterogeneity and provide methodological suggestions for future work.     

Slutzky equations and substitution effects of risks in terms of mean-variance preferences

This paper uses duality to elaborate Slutzky equations of risks in quasi-linear decision models extended by independent background risks. Wealth, substitution and total effects are characterized in terms of mean-variance preferences. It is shown that both Pratt and Zeckhauser’s proper risk aversion and Kimball’s standard risk aversion are sufficient for negative substitution effects.     

Community Development, Partnership Governance and Dilemmas of Professionalization: Profiling and Assessing the Case of Ireland

Over the last two decades, Ireland has emerged as a paradigmaticcase of partnership governance. Underpinned by state-facilitatednational agreements that sought to maximize economic and socialdevelopment, ‘partnership’ was also held to includethe development of progressive social policies. The ‘communityand voluntary sector’ has been both the site and purportedvehicle for these progressive policies. In this context, communitydevelopment emerged as a discourse of social action that wasboth popular with what Donnelly-Cox and Jaffro (1999) have inthe Irish context called ‘second generation communitydevelopment’, i.e. the emergence of self-activated localcommunity groups informed by a social justice ethos, and tothe Irish state as a route to social inclusion for an arrayof marginalized social groups. Since the early 1990s, thesegroups have been the recipients of significantly increased statefunding. This resource has had a dramatic effect on the structureand nature of community development. In this paper, we outlineand assess the model of community development that has emergedin Ireland during this period. Based on empirical data arisingfrom a nationwide survey of community workers, we profile theextent of state funding; the consequent employment profile ofcommunity development workers and the impact on volunteerism;and the nature and consequence of community development’semerging relationship with the Irish state.     

Political influence in multi-choice institutions: cyclicity,anonymity, and transitivity

We study political influence in institutions where each member chooses a level of support for a collective goal. These individual choices determine the degree to which the goal is reached. Influence is assessed by newly defined binary relations, each of which ranks members on the basis of their relative performance at a corresponding level of participation. For institutions with three options (e.g., voting games in which each voter may vote “yes”, “abstain”, or vote “no”), we obtain three influence relations, and show that their strict components may be cyclic. This latter property describes a “paradox of power” which contrasts with the transitivity of the unique influence relation of binary voting games. Weak conditions of anonymity suffice for each of these relations to be transitive. We also obtain a necessary and sufficient condition for each of these relations to be complete. Further, we characterize institutions in which the rankings induced by these relations, and the Banzhaf–Coleman and Shapley–Shubik power indices coincide. We argue that extending the influence relations to firms would be useful in efficiently assigning workers to different units of production. Finally, we provide applications to various forms of political and economic organizations.     

Paying for permanence: Public preferences for contaminated site cleanup

We use conjoint choice questions to investigate the preferences of people in four cities in Italy for income and future/permanent mortality risk reductions delivered by contaminated site remediation policies. The VSL is €5.6 million for an immediate risk reduction. If the risk reduction takes place 20 years from now, the implied VSL is €1.26 million. Respondents’ implicit discount rate is 7%. The VSL depends on respondent characteristics, familiarity with contaminated sites, concern about the health effects of exposure to toxicants, having a family member with cancer, perceived usefulness of public programs and beliefs about the goals of government remediation programs.

Economic Darwinism

We define an evolutionary process of “economic Darwinism” for playing the field, symmetric games. The process captures two forces. One is “economic selection”: if current behavior leads to payoff differences, behavior yielding lowest payoff has strictly positive probability of being replaced by an arbitrary behavior. The other is “mutation”: any behavior has at any point in time a strictly positive, very small probability of shifting to an arbitrary behavior. We show that behavior observed frequently is in accordance with “evolutionary equilibrium”, a static equilibrium concept suggested in the literature. Using this result, we demonstrate that generally under positive (negative) externalities, economic Darwinism implies even more under- (over-)activity than does Nash equilibrium.     

Social Care and the Modern Citizen: Client, Consumer, Service User, Manager and Entrepreneur

Since coming to power, New Labour has embarked on a programmeof modernization. Few areas of state activity have been morevisibly subjected to New Labour’s modernization agendathan the personal social services. Local authority social servicesdepartments have largely ceased to exist as separate organizationalentities. However, modernization has also required that therelationship between state and citizen be reconstructed. Thisis evident in New Labour’s vision for adult social carewhich envisages a move towards individual budgets. The individualizingnature of such schemes may be thought hard to reconcile withthe discourse of integration and partnership prominent elsewhere.However, a key linking concept is that of ‘person-centredness’.It is often assumed that this simply means that public servicesbecome more flexible to meet the needs of ‘the person’.This paper uses the example of direct payments to demonstratehow modernization also requires flexibility of ‘the person’.It would appear that inherent in New Labour’s projectof modernization is the assumption that the modern citizen shouldbe both managerial and entrepreneurial. What were once publicresponsibilities are being transferred to the individual. Theimplications for the users of adult social care are discussed.     

Sleepiness,choice consistency,and risk preferences

We investigate the consistency and stability of individual risk preferences by manipulating cognitive resources. Participants are randomly assigned to an experiment session at a preferred time of day relative to their diurnal preference (circadian matched) or at a non-preferred time (circadian mismatched) and choose allocations between two risky assets [using the Choi et al. (Am Econ Rev 27(5):1921–1938, 2007), design]. We find that choices of circadian matched and mismatched subject are statistically similar in terms of satisfying basic requirements for preference consistency. However, mismatched subjects tend to choose riskier asset bundles.     

School environment and risk preferences: Experimental evidence

Using a field experiment with high school students, we evaluate the development of risk preferences. Examining the impact of school characteristics on preference development reveals both peer and quality effects. For the peer effect, individuals in schools with a higher percentage of students on free or reduced lunches (hence a higher proportion of low-income peers with whom to interact) are significantly more risk averse. For the quality effect, individuals in schools with smaller class sizes and a higher percentage of educators with advanced degrees have higher, more moderate levels of risk aversion. We further discuss economic, cognitive and emotional development theories of risk preferences. Data show demographic-related patterns: girls are more risk averse on average, while taller and nonwhite individuals are more risk tolerant.     

Parametric multi-attribute utility functions for optimal profit under risk constraints

We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in an expected prospect maximization problem. For what we call the infimum of expectations class of risk measures, we show that if the decision maker (DM) maximizes the expectation of a random prospect under constraint that the risk measure is bounded above, he then behaves as a “generalized expected utility maximizer” in the following sense. The DM exhibits ambiguity with respect to a family of utility functions defined on a larger set of decisions than the original one; he adopts pessimism and performs first a minimization of expected utility over this family, then performs a maximization over a new decisions set. This economic behaviour is called “maxmin under risk” and studied by Maccheroni (Econ Theory 19:823–831, 2002). As an application, we make the link between an expected prospect maximization problem, subject to conditional value-at-risk being less than a threshold value, and a non-expected utility economic formulation involving “loss aversion”-type utility functions.     

Country preferences,currency values and policy issues

The paper sketches an approach to exchange rate modeling that links currency values to the prospective income streams associated with claims on physical capital in different countries. This framework represents an alternative to general equilibrium models in which asset preferences are derived essentially from the use of different transactions currencies in different countries. The new framework provides perspectives on: the safe-haven phenomenon; the role for monetary policy and the debate over fixed versus flexible exchange rates; the effectiveness of exchange market intervention; and the dual nature of policies toward capital flows and policies toward tradable goods industries.     

On Decomposing Net Final Values: Eva,Sva and Shadow Project

A decomposition model of Net Final Values (NFV), named Systemic Value Added (SVA), is proposed for decision-making purposes, based on a systemic approach introduced in Magni [Magni, C. A. (2003), Bulletin of Economic Research 55(2), 149–176; Magni, C. A. (2004) Economic Modelling 21, 595–617]. The model translates the notion of excess profit giving formal expression to a counterfactual alternative available to the decision maker. Relations with other decomposition models are studied, among which Stewart’s [Stewart, G.B. (1991), The Quest for Value: The EVA™ Management Guide, Harper Collins, Publishers Inc]. The index here introduced differs from Stewart’s Economic Value Added (EVA) in that it rests on a different interpretation of the notion of excess profit and is formally connected with the EVA model by means of a shadow project. The SVA is formally and conceptually threefold, in that it is economic, financial, accounting-flavoured. Some results are offered, providing sufficient and necessary conditions for decomposing NFV. Relations between a project’s SVA and its shadow project’s EVA are shown, all results of Pressacco and Stucchi [Pressacco, F. and Stucchi, P. (1997), Rivista di Matematica per le Scienze Economiche e Sociali 20, 165–185] are proved by making use of the systemic approach and the shadow counterparts of those results are also shown.     

Contingency,novelty and choice. Cultural evolution as internal selection

Sociological, economic and evolutionary paradigms of human agency have often seen social agents either as the rational controllers of their fate or as marionettes on the strings of historical, functional or adaptive necessity. They found it therefore difficult to account for the variability, intentionality and creativity of human behaviour and for its frequently redundant or harmful results. This paper argues that human agency is a product of evolution, but that genetic variation and inheritance can only provide a limited explanation of its complex nature. The primary evolutionary problem which human agents face while they are alive is not to adapt to stable environments, but to respond flexibly and creatively to a contingent, uncertain world. Variation and selection therefore take two connected but distinct forms, one external, genetic, and inherited across generations, the other internal and cognitive, and operating during the lifetime of individuals. An examination of this lived part of evolution provides a better understanding of key properties of agency.     

Risk, Mental Disorder and Social Work Practice: A Gendered Landscape

Whilst the importance of gender for social work practice, riskand mental health has been recognized theoretically for sometime, few attempts have been made to explore this area empirically.This paper presents findings from a mixed-methods study of socialwork practice in relation to mental health service users perceivedto be ‘high-risk’. Findings suggest, first, thatthe concept ‘high-risk’ was gendered because theprimary focus in social work practice was on the risks posedby male service users to others. Second, female social workersin the present study were found to have more female serviceusers from their caseloads who had been defined as ‘high-risk’compared with their male counterparts. The paper goes on toexplore this apparent congruence between female social workersand female service users and highlights how the management ofrisk could be considered gendered because it reflects a worker’s(perceived) capacity in cultural terms to ‘decode’the nature of the risks that their clients face as genderedsubjects. The paper demonstrates how the intersections betweenrisk, mental disorder and social work practice can thereforebe understood as a gendered landscape. It concludes by highlightingthe implications of these findings for social work practiceand research.     

Democracy and interdependent preferences

In a democracy, the views and wishes of the citizens are to count. The problem here is how this dictum is to be understood. I suggest that a proper analysis requires that each person's preferences be seen in the context of his beliefs concerning the preferences of the others and of the preferences he would have if he held different beliefs. Preferences founded on erroneous beliefs call for special consideration. So also do certain reluctantly held preferences. I propose a decision-policy involving the identification of social equilibria of preference.     

A note on uncertainty and discounting in models of economic growth

The implications of uncertainty for appropriate discounting in models of economic growth have been studied at some length, notably, (Review of Economic Studies, 36:153–163; 1969) and (Journal of Public Economics, 85:149–166; 2002). A detailed account has now appeared in Journal of Risk and Uncertainty, 37:141–169; 2008, sections 4 and 5 (pp. 160–166). One interesting, if perhaps minor, aspect is that under certain circumstances, there appeared to be no solution or at least no satisfactory one. More importantly, the formulas are usually given for the log normal case and are somewhat complicated and hard to interpret intuitively. I show here that assuming a general distribution for returns to capital gives simpler and more understandable results.