Lottery Decisions and Probability Weighting Function

This article analyzes the implications of basic lottery tests for the probability weighting function w(p). We first show that the w(p) function with one argument cannot accommodate three basic tests of lottery choice. We also discuss in detail the links between the w(p) function with one argument and the preference reversal paradox. In the last section we propose an evaluation function that accommodates the restrictions imposed by the tests and we provide an example of such function.     

The GED certificate and the poverty status of adult women

Are women who hold a General Educational Development (GED) certificate less likely to ever be in poverty? Using data from the National Longitudinal Survey of Youth, this study examines the probability of entering poverty for women. Given that a woman is poor, the study also examines the probability of exiting poverty. The analysis differentiates between high school dropouts, GED certificate holders, and high school graduates, and it is restricted to the first entry into poverty and the first exit out of poverty. In general, the results show that the GED certificate may be an economically beneficial route for women to achieve short-term earnings growth and remain out of poverty, as compared to dropping out of high school. The analysis shows that women with a GED certificate have a significantly higher probability of entry into poverty than high school graduates. However, a GED certificate increases the probability that a woman will exit poverty, compared to high school dropouts. This finding differs from other studies about the economic impact of the GED certificate.     

Insurance with undiversifiable risk: Contract structure and organizational form of insurance firms

Previous explanations of the contract choice and organizational form of insurance firms do not explain, by themselves, the recent proliferation of mutuals and new contract designs. We first present risk-bearing arguments to address these phenomena. We present two forms of insurance. The first is a conventional transfer of risk whereas the second decomposes risk between idiosyncratic and nonidiosyncratic. We show that the latter form leads to more active trade in insurance markets with correlated exposures. Moreover, the decomposed form dominates the simple transfer. These results qualify and extend the work of Borch (1962) and Marshall (1974). Market responses to the recent liability insurance crisis are compatible with these predictions.This research was conducted while G. Dionne was visiting the University of Pennsylvania under grants from Huebner Foundation and CRSH Canada. N. Doherty wishes to acknowledge with thanks support from the National Science Foundation under grant #88-09299. We wish to thank Patricia Danzon, Beverly Dahlby, Claude Fluet, James Garven, Scott Harrington, Howard Kunreuther, Clifford Smith Jr., George Theall, Kip Viscusi, and a referee for helpful comments.     

The decommodified security ratio: A tool for assessing European social protection systems

With a view to better assessment of the roles played by social security and social policy in determining well-being, this article introduces the "decommodified security ratio" (DSR), an instrument for evaluating an important duty of the social State, namely to maintain and improve people's economic security. To that end we describe the conventions for its use, analyse its main components in 20 European countries in 2002 and simulate the changes in it produced by ten variations in those components. From an analysis of the sensitivities of economic security we then demonstrate three different rationales.     

Is there a role for statisticians in pay equity?

After analyzing the salary structures of over 20 organizations in the process of implementing the requirements of the Pay Equity Act of the Province of Ontario, I found that one apparently invariant characteristic was the uniqueness of each salary structure — even among organizations with similar organizational structures. In almost every analysis, diagnostics suggested features of the gender gap that were not captured in the initial regression model. In studying a salary structure for the purposes of pay equity, the statistician is expected to help produce gender-neutral measures of the value of jobs and to estimate the shape and size of the gap between salaries of women and men for work of comparable value. We are expected to provide an “objective and unbiased” component to a very complex process fraught with subjectivity and bias. When we analyze real salary data with modern statistical tools, we generally find more questions than answers, yet we are expected to recommend some form of partial remedy for gender inequity within the legislated framework for pay equity plans. One (unsatisfying) solution to the dilemma would be to leave this type of work to analysts whose techniques don't confront them with the inadequacy of their models. This paper describes some experiences and observations gleaned from the analysis of real pay data for pay equity. It provides some answers, but they are, admittedly, much less compelling than the questions.     

Lottery qualities

The aim of this paper is to propose a model of decision-making for lotteries. Lottery qualities are the key concepts of the theory. Qualities allow the derivation of optimal decision-making processes and are taken explicitly into account for lottery evaluation. Our contribution explains the major violations of the expected utility theory for decisions on two-point lotteries and shows the necessity of giving explicit consideration to lottery qualities. Judged certainty equivalent and choice certainty equivalent concepts are discussed in detail along with the comparison of lotteries. Examples are provided by using different test results in the literature. JEL Classification D81     

Comparative Mixed Risk Aversion: Definition and Application to Self-Protection and Willingness to Pay

We analyze the optimal choices of agents with utility functions whose derivatives alternate in sign, an important class that includes most of the functions commonly used in economics and finance (Mixed Risk Aversion, MRA, Caballé and Pomansky, 1996). We propose a comparative mixed risk aversion definition for this class of utility functions, namely, More Risk Averse MRA, and provide a sufficient condition to compare individuals. We apply the model to optimal prevention and willingness to pay. More risk averse MRA agents spend less to reduce accident probabilities that are above 1/2. They spend more only when accident probabilities are below 1/2. Explanations in terms of risk premiums are provided. The results presented also allow for the presence of background risk.     

Does insurance fraud in automobile theft insurance fluctuate with the business cycle?

Financial institutions face various cyclical risks, but very few studies have analyzed the cyclicality of operational risk. External fraud is an important operational risk faced by insurers. In this research, we analyze the empirical relationship between insurance fraud and the business cycle and we concentrate our study on two insurance contracts that may create an incentive to defraud. We find that residual insurance fraud exists both in the contract with replacement cost endorsement and the contract with no-deductible endorsement in the Taiwan automobile theft insurance market. These results are consistent with previous literature on the relationship between fraud activity and non-optimal insurance contracting. We also show that the severity of insurance fraud is countercyclical. Fraud is stimulated during periods of recession and mitigated during periods of expansion. Although this last result seems intuitive, our contribution is the first to measure its significance.