Preferences with Frames: A New Utility Specification that Allows for the Framing of Risks

39 Pages Posted: 7 Jul 2007

See all articles by Nicholas Barberis

Nicholas Barberis

Yale School of Management; National Bureau of Economic Research (NBER)

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: June 2007

Abstract

Experimental work on decision-making shows that, when people evaluate risk, they often engage in narrow framing: that is, in contrast to the prediction of traditional utility functions defined over wealth or consumption, they often evaluate risks in isolation, separately from other risks they are already facing. While narrow framing has many potential applications to understanding attitudes to real-world risks, there does not currently exist a tractable preference specification that incorporates it into the standard framework used by economists. In this paper, we propose such a specification and demonstrate its tractability in both consumption/portfolio choice and equilibrium settings.

Keywords: behavioral finance, diversification, equity premium, utility functions

JEL Classification: D1, D8, G11, G12

Suggested Citation

Barberis, Nicholas and Huang, Ming, Preferences with Frames: A New Utility Specification that Allows for the Framing of Risks (June 2007). Available at SSRN: https://ssrn.com/abstract=997862 or http://dx.doi.org/10.2139/ssrn.997862

Nicholas Barberis

Yale School of Management ( email )

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National Bureau of Economic Research (NBER)

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Ming Huang (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-225-9594 (Phone)

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