Advertisement

Consumption, Savings and Asset Returns with Non-Expected Utility

  • Larry G. Epstein

Abstract

Over the last dozen years, the standard models of decision making under risk and uncertainty have come under renewed scrutiny because of their failure to describe choices observed in experimental settings; the Allais and Ellsberg paradoxes are the best known instances of descriptive failures of the (subjective) expected utility model. In addition, a number of generalizations of the expected utility model have been developed. These ‘nonexpected utility’ theories have proven useful in several ways. First, they have provided models of preference that can ‘explain’, or at least accommodate the cited experimental evidence. Equally important, they have stimulated new experimental tests of decision making in laboratory settings that should help to provide further insights into the way in which subjects make choices. In addition, they have provided a deeper understanding of the expected utility model, both at an axiomatic level and at the more practical level of clarifying why it is that the expected utility model has proven so tractable in modeling applications.

Keywords

Risk Aversion Euler Equation Asset Price Asset Return Certainty Equivalent 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Bonomo, M. and R. Garcia (1993), “Disappointment Aversion as a Solution to the Risk-Free Puzzle”, U. Montreal, mimeo.Google Scholar
  2. Campbell, J.Y. (1994), “Intertemporal Asset Pricing without Consumption Data”, American Economic Review 83, 487–512.Google Scholar
  3. Campbell, J.Y. and J.H. Cochrane (1994), “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behaviour,” NBER #4995.Google Scholar
  4. Chami, R., T. Cosimano and C. Fullenkamp (1994), “A General Equilibrium Approach to Asset Pricing in an Efficient Market,” Working Paper, U. Notre Dame,.Google Scholar
  5. Chew, S.H. (1989), “Axiomatic Utility Theories with the Betweeness Property”, Annals of Operations Research 19, 273–298.CrossRefGoogle Scholar
  6. Chew, S.H. and L.G. Epstein (1991), “Recursive Utility Under Uncertainty,” in Equilibrium Theory with an Infinite Number of Commodities, A. Khan and N. Yannelis eds., New York: Springer, 352–369.Google Scholar
  7. Cochrane, J.H. and L.P. Hansen (1992), “Asset Pricing Explorations for Macroeconomics”, NBER Working Paper #4088.Google Scholar
  8. Constantinides, G.M. (1990), “Habit Formation: A Resolltion of the Equity Premium Puzzle”, J Pol. Econ. 98, 519–543.CrossRefGoogle Scholar
  9. Dekel, E. (1986), “An Axiomatic Characterization of Preferences Under Uncertainty”, J. Econ. Theory 40, 304–318.CrossRefGoogle Scholar
  10. Duffie, D. and L.G. Epstein (1992a), “Stochastic Differential Utility,” Econometrica 60, 353–394.CrossRefGoogle Scholar
  11. Duffie, D. and L.G. Epstein (1992b), “Asset Pricing with Stochastic Differential Utility,” R. Fin. Stud. 5, 411–436.CrossRefGoogle Scholar
  12. Epstein, L.G. (1988), “Risk Aversion and Asset Prices”, J. Monetary Ecs. 22,179–192.CrossRefGoogle Scholar
  13. Epstein, L.G. (1992), “Behaviour Under Risk: Recent Developments in Theory and Applications”, in Advances in Economic Theory, Vol.II. J.J. Laffont ed., Cambridge U. Press.Google Scholar
  14. Epstein, L.G. and M. LeBreton (1993), “Dynamically Consistent Beliefs Must Be Bayesian,” J. Ec. Theory 61, 1–22.CrossRefGoogle Scholar
  15. Epstein, L.G. and A. Melino (1995), “A Revealed Preference Analysis of Asset Pricing Under Recursive Utility,” Rev. Ec. Stud. 62, 597–618.CrossRefGoogle Scholar
  16. Epstein, L.G. and T. Wang (1994), “Intertemporal Asset Pricing Under Knightian Uncertainty”, Econometrica 62, 283–322.CrossRefGoogle Scholar
  17. Epstein, L.G. and T. Wang (1995), “Uncertainty, Risk-Neutral Measures and Security Price Booms and Crashes,” J. Ec. Theory 67, 40–82.CrossRefGoogle Scholar
  18. Epstein, L.G. and S. Zin (1989), “Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework”, Econometrica, 57, 937–969.CrossRefGoogle Scholar
  19. Epstein, L.G. and S. Zin (1990), “First-Order Risk Aversion and the Equity Premium Puzzle”, J. Monetary Ecs. 26, 387–407.CrossRefGoogle Scholar
  20. Epstein, L.G. and S. Zin (1991), “Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis”, J. Pol. Econ. 99, 263–286.CrossRefGoogle Scholar
  21. Epstein, L.G. and S. Zin (1992), “The Independence Axiom and Asset Returns”, NBER Technical Working Paper #109.Google Scholar
  22. Gilboa, I. and D. Schmeidler (1989), “Maxmin Expected Utility with Nonunique Prior,” J. Math. Econ. 18, 141–153.CrossRefGoogle Scholar
  23. Gordon, S., L. Samson and B. Carmichael (1994), “Sampling-Based Estimation of the Intertemporal Marginal Rate of Substitution”, Cahier 9401, U. Laval.Google Scholar
  24. Grossman, S.J. and R.J. Shiller (1981), “The Determinants of the Variability of Stock Market Prices”, American Economic Review 71, 222–227.Google Scholar
  25. Gul, F. (1991), “A Theory of Disappointment Aversion,” Econometrica 59, 667–686.CrossRefGoogle Scholar
  26. Hadar, J. and W.R. Russell (1969), “Rules for Ordering Uncertain Prospects”, American Economic Review 59, 25–34.Google Scholar
  27. Hansen, L.P. and S. Richard (1987), “The Role of Conditioning Information in Deducing Testable Restrictions Implied by Dynamic Asset Pricing Models,” Econometrica 55, 587–614.CrossRefGoogle Scholar
  28. Hansen, L.P. and T.J. Sargent (1992), “Discounted Linear Exponential Quadratic Gaussian Control”, mimeo.Google Scholar
  29. Hansen, L.P., T.J. Sargent and T.D. Tallarini Jr. (1993), “Pessimism, Neurosis, and Feelings about Risk in General Equilibrium”, mimeo.Google Scholar
  30. Hansen, L.P. and K.J. Singleton (1983), “Stochastic Consumption, Risk Aversion and the Temporal Behavior of Asset Returns”, J. Pol. Econ. 91, 249–265.CrossRefGoogle Scholar
  31. Hung, M.W. (1994), “The Interaction Between Nonexpected Utility and Assymmetric Market Fundamentals,” J. Finance 49, 325–343.CrossRefGoogle Scholar
  32. Kandel, S. and R.F. Stambaugh (1991), “Asset Returns and Intertemporal Preferences”, J. Monetary Ecs. 27, 39–71.CrossRefGoogle Scholar
  33. Keynes, J. M. (1936), The General Theory of Employment Interest and Money.London: Macmillan.Google Scholar
  34. Klibanoff, P. (1993), “Dynamic Choice with Uncertainty Aversion,” Kellogg School, Northwestern U., mimeo.Google Scholar
  35. Kocherlakota, N. (1987), State Nonseparability: Theory and Empirical Implications, Ph.D. Thesis, U. Chicago.Google Scholar
  36. Kreps, D. and E. L. Porteus (1978), “Temporal Resolution of Uncertainty and Dynamic Choice Theory,” Econometrica 46, 185–200.CrossRefGoogle Scholar
  37. Lucas, R.E. Jr. (1978), “Asset Prices in an Exchange Economy”, Econometrica, 46, 1429–1445.CrossRefGoogle Scholar
  38. Ma, C. (1993), “Market Equilibrium with Heterogeneous Agents and Recursive-Utility-Maximizing Agents,” Economic Theory 3, 243–266.CrossRefGoogle Scholar
  39. Machina, M.J. (1982), ‘“Expected Utility’ Analysis Without the Independence Axiom,” Econometrica 50, 1069–1079.CrossRefGoogle Scholar
  40. Machina, M.J. (1989), “Dynamic Consistency and Non-Expected Utility Models of Choice Under Uncertainty,” J. Ec. Lit. 27, 1622–1668.Google Scholar
  41. Machina M.J. and D. Schmeidler (1992), “A More Robust Definition of Subjective Probability,” Econometrica 60, 745–780.CrossRefGoogle Scholar
  42. Mehra, R. and E. Prescott (1985), “The Equity Premium: A Puzzle”, J. Monetary Ecs. 15, 145–161.CrossRefGoogle Scholar
  43. Melino, A. and L.G. Epstein (1995), “An Empirical Analysis of Asset Returns Under ‘Non-Bayesian Rational Expectations’,” mimeo.Google Scholar
  44. Naik, V. (1994), “Asset Prices in Dynamic Production Economies with TimeVarying Risk,” Rev. Fin. Stud. 7, 781–801.CrossRefGoogle Scholar
  45. Obstfeld, M. (1992), “Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability”, NBER Technical Working Paper #120.Google Scholar
  46. Ozaki, H. and P. Streufert (1996), “Dynamic Programming for Non-Additive Stochastic Objectives,” Journal of Mathematical Economics, 25(4),391–442.CrossRefGoogle Scholar
  47. van der Ploeg, F. (1993), “A Closed-Form Solution for a Model of Precautionary Saving,” Rev. Econ. Studies 60, 385–396.CrossRefGoogle Scholar
  48. Restoy, F. and P. Weil (1994), “Approximate Equilibrium Asset Prices,” mimeo.Google Scholar
  49. Schmeidler, D. (1989), “Subjective Probability and Expected Utility Without Additivity,” Econometrica 57, 571–587.CrossRefGoogle Scholar
  50. Skiadas, C. (1995), “Time Coherent Choice and Preferences for Information,” Working Paper #196, Kellogg School, Northwestern University.Google Scholar
  51. Walley, P. (1991), Statistical Reasoning with Imprecise Probabilities, Chapman and Hall, London.Google Scholar
  52. Wang, S. (1993), “The Local Recoverability of Risk Aversion and Intertemporal Substitution”, J. Econ. Theory 59, 333–363.CrossRefGoogle Scholar
  53. Weil, P. (1989), “The Equity Premium Puzzle and the Risk-Free Rate Puzzle”, J. Monetary Ecs. 24, 401–422.CrossRefGoogle Scholar
  54. Weil, P. (1990), “Nonexpected Utility in Macroeconomics”, Quarterly J. Ecs. 105, 29–42.CrossRefGoogle Scholar
  55. Weil, P. (1993), “Precautionary Savings and the Permanent Income Hypothesis,” Rev. Econ. Studies 60, 367–384.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 1999

Authors and Affiliations

  • Larry G. Epstein

There are no affiliations available

Personalised recommendations