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Annual Review of Economics - Volume 4, 2012
Volume 4, 2012
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Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences
Vol. 4 (2012), pp. 567–593More LessA large body of evidence has documented that risk preferences depend nonlinearly on outcome probabilities. We discuss the foundations and economic consequences of probability-dependent risk preferences and offer a practitioner's guide to understanding and modeling probability dependence. We argue that probability dependence provides a unifying framework for explaining many real-world phenomena, such as the equity premium puzzle, the long-shot bias in betting markets, and households' underdiversification and their willingness to buy small-scale insurance at exorbitant prices. Recent findings indicate that probability dependence is not just a feature of laboratory data, but is indeed manifest in financial, insurance, and betting markets. The neglect of probability dependence may prevent researchers from understanding and predicting important phenomena.
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The Theory of Clubs and Competitive Coalitions
Vol. 4 (2012), pp. 595–626More LessThis review discusses research demonstrating that club economies and coalition economies with many participants and relatively small effective groups (clubs, jurisdictions, or coalitions) are competitive. Small groups are effective if all or almost all gains to collective activities can be realized by cooperation restricted to them. At this point, there are many papers in the literature demonstrating the competitiveness of club and coalition economies in a variety of contexts. To facilitate the exposition, I treat economies with quasi-linear utilities and games with side payments. The main concepts and results for this framework are discussed. Additionally, relationships are established with regard to broader models of club and coalition economies, including very recent contributions to the literature.
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The Promises and Pitfalls of Genoeconomics
Daniel J. Benjamin, David Cesarini, Christopher F. Chabris, Edward L. Glaeser, David I. Laibson, Age, Gene/Environment Susceptibility-Reykjavik Study:, Vilmundur Guðnason, Tamara B. Harris, Lenore J. Launer, Shaun Purcell, Albert Vernon Smith, Swedish Twin Registry:, Magnus Johannesson, Patrik K.E. Magnusson, Framingham Heart Study:, Jonathan P. Beauchamp, Nicholas A. Christakis, Wisconsin Longitudinal Study:, Craig S. Atwood, Benjamin Hebert, Jeremy Freese, Robert M. Hauser, Taissa S. Hauser, Swedish Large Schizophrenia Study:, Alexander Grankvist, Christina M. Hultman, and Paul LichtensteinVol. 4 (2012), pp. 627–662More LessThis article reviews existing research at the intersection of genetics and economics, presents some new findings that illustrate the state of genoeconomics research, and surveys the prospects of this emerging field. Twin studies suggest that economic outcomes and preferences, once corrected for measurement error, appear to be about as heritable as many medical conditions and personality traits. Consistent with this pattern, we present new evidence on the heritability of permanent income and wealth. Turning to genetic association studies, we survey the main ways that the direct measurement of genetic variation across individuals is likely to contribute to economics, and we outline the challenges that have slowed progress in making these contributions. The most urgent problem facing researchers in this field is that most existing efforts to find associations between genetic variation and economic behavior are based on samples that are too small to ensure adequate statistical power. This has led to many false positives in the literature. We suggest a number of possible strategies to improve and remedy this problem: (a) pooling data sets, (b) using statistical techniques that exploit the greater information content of many genes jointly, and (c) focusing on economically relevant traits that are most proximate to known biological mechanisms.
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