RESEARCH

Job Market Paper

Game Theory with Optimistic Players

Abstract: This paper extends a Nash Equilibrium concept under ambiguity aversion to include optimistic players in a normal form game. We provide examples that cast light on how the best equilibrium of a game with multiple equilibria can be attained when all agents are optimistic. Examples show that optimism can solve a problem of coordination in a way that leads to Pareto optimal allocations. We also analyze a battle of sexes example and show that if an optimistic agent faces a pessimistic agent, the optimistic player receives the highest payoff.

Work in Progress

A Choice Model for Source Dependence

Abstract: Source dependence refers to the situation where individual choices among ambiguous events is affected by the source of ambiguity. There is an amounting number of evidence on source dependence. Among these, we mention the two most important cases: competence hypothesis (Heath and Tversky, 1991) and comparative ignorance hypothesis (Fox and Tversky, 1995). The behavior described in these situations is not compatible with any current model of individual choice. I propose a theoretical choice model based on Schmeidler (1989) that accounts for source dependence. In our model, a person might be either optimistic or pessimistic, depending on his or her degree of knowledge. Moreover, current choice is affected by prior choices. I also test the implications of this theory with other interpretations from the behavioral literature, with a designed experiment that checks the validity of the theoretical model.

Probability Weighting Function for Gains and Losses and Multiple Sources of Ambiguity

Abstract: The estimation of utility functions for individual choice under uncertainty, either risk or ambiguity, is a prolific field in economics. The main goal in this literature is to describe the systematic pattern of behavior observed about choices under uncertainty. We further cast light to this field by assessing how choices are affected by the level of knowledge one has about the decision being made, for both domains of gains and losses. Our paper extends Kilka and Weber approach for gains to losses as well. We use Wu and Gonzalez probability weighting function parametric form to estimate individual utility functions.

Bankruptcy, Ambiguity, and Portfolio Diversification

(with Luis Braido)

Abstract: This paper studies optimal portfolio diversification when agents face a trade-off among some possibilities that are less risky but more ambiguity and others that are more risky but less ambiguous. Traditional economic theory predicts that workers should diversify their investments, and our main result provides an economic rationale to the observed fact that workers do not diversify by investing in their firms.

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Last Update: October 17, 2004 Ó 2004 Jose Guilherme de Lara Resende