Is associated with a test statistic. It is "the probability, if the test statistic really were distributed as it would be under the null hypothesis, of observing a test statistic [as extreme as, or more extreme than] the one actually observed."
The smaller the P value, the more strongly the test confirms the null hypothesis.

A p-value of .05 or less confirms the null hypothesis "at the 5% level" that is, the statistical assumptions used imply that only 5% of the time would the supposed statistical process produce a finding this extreme if the null hypothesis were false.

5% and 10% are common significance levels to which p-values are compared.

Source: econterms

A kind of index number. The official method for US price deflators computes them as a Paasche index. The algorithm is just like the Laspeyres index but the base quantities are chosen from the second, later period.

See also http://www.geocities.com/jeab_cu/paper2/paper2.htm.

Source: econterms

Data from a (usually small) number of observations over time on a (usually large) number of cross-sectional units like individuals, households, firms, or governments.

Source: econterms

Can by a synonym for 'face value' as in the expression "valuing a bond at par".

Source: econterms

This word is used in a particular way within the literature of economics -- not to describe a situation in which facts are apparently in conflict, but to describe situations in which apparent facts are in conflict with models or theories to which some class of people holds allegiance. This use of the word implies strong belief in the measured facts, and in the theory, and the resolution to economic paradoxes tend to be of the form that the data do not fit the model, the data are mismeasured or, (the most common case) the model or theory does not fit the environment measured.

In some ways the term paradox is awkward in economics since the data are so poorly measured, the models so brutally simplified, and the mapping between environment and evidence so stochastic. So this editor avoids the term where possible, but often it is a compact and vigorous way of telling the reader the context of the subsequent discussion.

A list of these that an economist may be expected to recognize includes: Allais paradox, Ellsberg paradox, Condorcet voting paradox, Scitovsky paradox, and productivity paradox.

Source: econterms

adjective. A function is 'parametric' in a given context if its functional form is known to the economist.
Example 1: One might say that the utility function in a given model is increasing and concave in consumption. But it only becomes parametric once one says that u(c)=ln(c) or u(c)=c^1-A/1-A. At this point only parameters such as A remain to be specified or estimated.
Example 2: In an econometric model one often imposes assumptions such as that the the relationship being estimated is linear, thence to do a linear regression. These are parametric assumptions. One might also make some estimates of the 'regression function' (the relationship) without such parametric assumptions. This field is called nonparametric estimation.

Source: econterms

The message below was posted to a Stata listserv and is reproduced here without any permission whatsoever.

  
Date: Thu, 28 Jan 1999 08:59:57 -0500  
From: 'Steichen, Thomas'   
Subject: RE: statalist: Re: Pareto diagrams    

[snip]    

Pareto charts are bar charts in which the bars are arranged in descending 
order, with the largest to the left. Each bar represents a problem.  The chart 
displays the relative contribution of each sub-problem to the total problem.   

 Why:  This technique is based on the Pareto principle, which states that a  
few of the problems often account for most of the effect.  The Pareto  
chart makes clear which 'vital few' problems should be addressed first.    

How:  List all elements of interest.  Measure the elements, using the same  
unit of measurement for each element.  Order the elements according to  
their measure, not their classification.  Create a cumulative distribution  
for the number of items and elements measured and make a bar and line  
graph.  Work on the most important elements first.    

Reference:  Wadsworth, Stephens and Godfrey. Modern Methods for Quality  
Control and Improvement, New York: John Wiley, 1986 and Kaoru Ishikawa,  
Guide To Quality Control, Asian Productivity Organization, 1982, Quality  
Resources, 1990.    

(Note: above info 'borrowed' from a web page)  

Source: econterms

Has cdf H(x) = 1 - x^(-a) where x>=0, a>0. This distribution is unbounded above. (A slightly different version, with two parameters, is shown in Hogg and Craig on p. 207.)

Source: econterms

An economic allocation is inefficient if there is an alternative allocation in which all agents are better off in terms of their own objective functions (utilities, profits, payoffs); it is said to be Pareto efficient if there is none such alternative allocation. Put differently, in an Pareto efficient state, it is impossible to improve one agent's state without making at least one other agent worse-off. This criterion generalizes the one of a maximal aggregate surplus to situations with incomparable objective functions (preferences). It is weak in that typically entire continua of Pareto efficient states exist; the criterion is therefore important mainly as a negative one, ruling out (institutions leading to) inefficient states as undesirable. With incomplete information about the agents' preferences, the notion of Pareto efficiency is ambiguous. An operational criterion of efficiency then depends on the state of the resolution of uncertainty: different allocations can be compared in terms of their ex-ante, their interim, or their ex-post efficiency.

Source: SFB 504

In an endowment economy, an allocation of goods to agents is Pareto Optimal if no other allocation of the same goods would be preferred by every agent. Pareto optimal is sometimes abbreviated as PO.

Optimal is the descriptive adjective, whereas optimum is a noun. A Pareto optimal allocation is one that is a Pareto optimum. There may be only one such optimum.

Source: econterms

The set of Pareto-efficient points, usually in a general equilibrium setting.

Source: econterms

Refers to a particular econometric model which is between a linear regression model and a completely nonparametric model:
y=b'X+f(Z)+e
where X and Z are known matrices of independent variables, y is a known vector of the dependent variable, f() is not known but often some assumptions are made about it, and b is a parameter vector. Assumptions are often made on e such as that e~N(0,s²I) and that E(e|X,Z)=0.
The project at hand is to estimate b and/or to estimate f() in a non-parametric way, e.g. with a kernel estimator.

Source: econterms

"[A] partition of a finite set (capital omega) is a collection of disjoint subsets of (capital omega) whose union is (capital omega)." -- Fudenberg and Tirole p 55

Source: econterms

unemployment and related social benefits and early retirement benefits. (contrast active)

Source: econterms

Following David (97): describes allocative stochastic processes. Refers to the way the history of the process relates to the limiting distribution of the process. "Processes that are non-ergodic, and thus unable to shake free of their history, are said to yield path dependent outcomes." (p. 13) "A path-dependent stochastic process is one whose asymptotic distribution evolves as a consequence" of the history of the process. (p. 14) The term is relevant to the outcome of economic processes through history. For example, the QWERTY keyboard standard would not be the standard if it had not been chosen early; thus the keyboard standard evolved through a path-dependent process.

Source: econterms

The view that technological change in a society depends quantitatively and/or qualitatively on its own past. "A variety of mechanisms for the autocorrelation can be proposed. One of them, due to David (1975) is that technological change tends to be 'local,' that is, learning occurs primarily around techniques in use, and thus more advanced economies will learn more about advanced techniques and stay at the cutting edge of progress." (Mokyr, 1990, p 163) A noted example of technological path dependence is the QWERTY keyboard, which would not be in use today except that it happened to be chosen a hundred years ago. A special interest in the research literature was taken in the question of whether technological path dependence has been observed to lead to noticeably Pareto-inferior outcomes later. Liebowitz and Margolis in a series of papers (e.g. in the JEP) have made the case that it has not -- that is that the QWERTY keyboard is not especially inferior to alternatives in productivity, and that the VHS videotapes were not especially inferior to Beta videotapes at the time consumers chose between them.

Source: econterms

In a game with two players, the payoffs to each player can be shown in a matrix. The one at right is from the classic Prisoners Dilemma game:

		Player Two
		C	D
Player One	C	3,3	0,4
	D	4,0	1,1

Here, player one's strategy choices (shown, conventionally, on the left) are C and D, and player two's, shown on the top, are also C and D. The payoffs of each possible choice of strategy pairs is in each cell of the matrix. The first number is the payoff to player one, and the second is the payoff to player two.

Source: econterms

probability distribution function. This function describes a statistical distribution. It has the value, at each possible outcome, of the probability of receiving that outcome. A pdf is usually denoted in lower case letters. Consider for example some f(x), with x a real number is the probability of receiving a draw of x. A particular form of f(x) will describe the normal distribution, or any other unidimensional distribution.

Source: econterms

Present Discounted Value

Source: econterms

An effect of production or transactions on outside parties through prices but not real allocations.

Source: econterms

In a noncooperative game, a profile of strategies is a perfect equilibrium if it is a limit of epsilon-equilibria as epsilon goes to zero.

There can be more than one perfect equilibrium in a game.

For a more formal definition see sources. This is a rough paraphrase.

Source: econterms

"A global concept referring to all those relatively permanent traits, dispositions, or characteristics within the individual, which give some degree of consistency to that person?s behaviour" (Feist, 1994). In 1927 Allport found almost 50 different definitions, so for a deeper understanding it should be explained according to its role in personality theory.

Source: SFB 504

Personality psychology is concerned with differences between individuals; it overlaps with developmental and social psychology to some extent. General orientations within personality psychology are the following:
• Trait theories propose traits as underlying properties; as such traits account for behavioural consistencies and stable individual differences between persons.
• Situationism argues that behaviour is mainly determined by the situation rather than by internal personality types or traits.
• Interactionism postulates that observed behaviour is a function of the interaction between the traits of an individual and the specific characteristics of the situation including traits of other persons who are present.

Source: SFB 504

Program Evaluation and Review Technique (is this used?)

Source: econterms

graph of a dynamical system, depicting the system's trajectories (with arrows) and stable steady states (with dots) and unstable steady states (with circles) in a state space. The axes are of state variables.

Source: econterms

A relation between inflation and unemployment. Follows from William Phillips' 1958 "The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957" in _Economica_. In the subsequent discussion the relation was thought to be a negative one -- high unemployment would correlate with low inflation. That stylized fact lost empirical support with the stagflation of the U.S. in the 1970s, in which high inflation and high unemployment occurred together. More recent evidence suggests that over the long term, across countries, there is a POSITIVE correlation between inflation and unemployment. Discussion continues on which of these is more 'causal to' the other and less 'caused by' the other. In recent use, "[T]he 'Phillips curve' has become a generic term for any relationship between the rate of change of a nominal price or wage and the level of a real indicator of the intensity of demand in the economy, such as the unemployment rate." -- Gordon, Robert G., "Foundations of the Goldilocks Economy" for Brookings Panel on Economic Activity, Sept 4, 1998.

Source: econterms

A test of a unit root hypothesis on a data series.

(Ed.: what follows is my best, but imperfect, understanding.) The Phillips-Perron statistic, used in the test, is a negative number. The more negative it is, the stronger the rejection of the hypothesis that there is a unit root at some level of confidence. In one example a value of -4.49 constituted rejection at the p-value of .10.

Source: econterms

phrases

Source: econterms

Decline in ability of assets to produce output. For example, computers, light bulbs, and cars have low physical depreciation; they work until they expire. Could be said to be made up of deterioration and exhaustion.

Source: econterms

The wealth effect on consumption as prices fall. A lower price level leads to a greater existing private wealth of nominal value, leading to a rise in consumption. Contrast the Keynes effect.

Source: econterms

a plant is an integrated workplace, usually all in one location.

Source: econterms

An adjective describing a distribution with low kurtosis. 'Low' means the fourth central moment is less than three times the second central moment; such a distribution has less kurtosis than a normal distribution.
Platy- means 'fat' in Greek and refers to the central part of the distribution. Platykurtic distributions are not as common as leptokurtic ones.

Source: econterms

Pareto Optimal

Source: econterms

A discrete distribution. Possible values for x are the integers 1,2,3,...

Denoting mean as mu, the Poisson distribution has mean mu, variance mu, and pdf (e^-mumu^-x)/x!. Moment-generating function (mgf) is exp(mu(e^t-1)).

Source: econterms

In such a process, let n be the number of events that occur in a given time. n will have a Poisson distribution.

Source: econterms

The academic subject centering on the relations between governments and other governments, and between governments and peoples.

Source: econterms

Group with an organized governance. Normally a politically organized population or can be a religious one.

Or, form of governance.

Examples needed. Use is very context-sensitive; that is, the definition is not too informative without examples.

Source: econterms

Multiple choice. In the context of discrete choice econometric models, means that the dependent variable has more than two possible values.

Source: econterms

One of two ways to do the accounting for a U.S. firm after a merger. The alternative is purchase accounting.

A pooling of interests is the method usually taken for all-stock deals.

Source: econterms

In poverty, which see.

Source: econterms

a test for serial correlation in a time series, not just of one period back but of many. Standard reference is Ljung and Box (1978). The equation characterizing this test is given on page 18, footnote 15, of Bollerslev-Hodrick 1992 and will go in here when html has an equation format.

Source: econterms

As commonly defined by U.S. researchers: the state of living in a family with income below the federally defined poverty line. poverty

Source: econterms

"The power of a test statistic T is the probability that T will reject the null hypothesis when the hypothesis is not true.

Formally, it is the probability that a draw of T is in the rejection region given that the hypothesis is not true.

Source: econterms

A continuous distribution with a parameter that we will denote k. Pdf is kx^k-1. Mean is k/(k+1). Variance is k/[(1+k)²(2+k)].

This distribution has not been found to correspond to natural or economic phenomena, but is useful in practice problems because it is algebraically tractable.

Source: econterms

Short for Production Possibilities Frontier.

Source: econterms

Stands for purchasing power parity, a criterion for an appropriate exchange rate between currencies. It is a rate such that a representative basket of goods in country A costs the same as in country B if the currencies are exchanged at that rate.

Actual exchange rates vary from the PPP levels for various reasons, such as the demand for imports or investments between countries.

Source: econterms

An improvement to the original Cochrane-Orcutt algorithm for estimating time series regressions in the presence of autocorrelated errors. The implicit reference is to Prais-Winsten (1954).

The Prais-Winsten tranformation makes it possible to include the first observation in the estimation.

Source: econterms

Means before taking account of the government's fiscal policy. Usually refers to personal incomes before taxes and government transfers between people. For example a researcher might take more interest in pre-fisc income inequality than in post-fisc income inequality because the effects of government transfers are designed specifically to reduce inequality.

Source: econterms

Savings accumulated by an agent to prepare for future periods in which the agent's income is low.

Source: econterms

reciprocal of the variance

Source: econterms

The practice of selling a product at low prices in order to drive competitors out, discipline them, weaken them for possible mergers, and/or to prevent firms from entering the market. It is an expensive strategy.

In the United States there is no legal (statutory) definition of predatory pricing, but pricing below marginal cost (the Areeda-Turner test) has been used by the Supreme Court in 1993 as a criterion for pricing that is predatory. (Salon magazine, 1998/11/11)

Source: econterms

Those that are known at the beginning of the current time period. In an econometric model, means exogenous variables and lagged endogenous variables.

Source: econterms

A statement of preference is a statement of judgement. It is subjective in the sense that it expresses somebody´s preference of something over something else. It is relative because something is preferred over something else, and because subject´s pure preferences may change over time (the latter could be viewed as a change of taste).

In a narrow sense, the concept of preferences as used by economists can be understood in terms of consumer preferences over consumption goods. The consumer´s preferences order the set of consumption bundles available to him. (A consumption bundle is a combination of all available commodities that are consumed, where the share of each commodity can either be zero or have some positive value.) The expression xPy means that the consumer prefers some bundle x over a bundle y, i.e., the consumer thinks that the bundle x is at least as good as the bundle y. Accordingly, preferences can be understood as a mathematical relation on the set of available consumption bundles. The following properties of this relation are assumed to hold: The preference relation is complete (i.e., any two bundles can be compared), reflexive, and transitive.

The assumption of transitivity is required for any discussion of preference maximization; if preferences were not transitive, there might be sets of bundles which had no best elements. Additionally, certain continuity assumptions may be required. Given these properties of preferences over consumption bundles, a utility function can be shown to exist. In experimental studies, however, transitivity has repeatedly been shown to be violated (see Tversky (1977) or Goldstone, Medin & Halberstadt (1997)).

Source: SFB 504

A present-oriented agent discounts the future heavily and so has a HIGH discount rate, or equivalently a LOW discount factor. See also 'future-oriented', 'discount rate', and 'discount factor'.

Source: econterms

Law requiring that a price for a certain good be kept below some level. May lead to shortage and a black market.

Source: econterms

Inputs i and j to a production function are "price complements in production" if when the price of i goes down the use of both i and j go up.

Source: econterms

A measure of responsiveness of some other variable to a change in price. See elasticity for the the general equation.

Source: econterms

Law requiring that a price for a certain good be kept above some level.

Source: econterms

A single number summarizing price levels.

A larger number conventionally represents higher prices. A variety of algorithms are possible and a precise specification (which is rare) requires both an algorithm (an example of which is a Laspeyres index) and a set of goods, fixed known quantities of each (the basket),

Source: econterms

Inputs i and j to a production function are "price substitutes in production" if when the price of i goes down the use of j goes up.

Source: econterms

Exchange ratio for economic goods and services, denominated in terms of a numeraire good called 'money' and determined endogenously as part of a market equilibrium. Prices are terms of trade for exchanging economic goods on markets, like wages as prices for labor duties, interest rates as prices for gain access to future liquidity today, insurance premiums as prices for bearing risk, or option prices as prices for the right to buy or sell at prespecified conditions at a later date.

Prices indicate the 'social' opportunity cost of giving up a marginal unit of goods in exchange for a marginal unit of the numeraire good (money). Thus, they reflect the relative marginal desirability (and costliness) of trading a particular good, as implied by the traders' preferences, technologies, and resources, and hence signal the marginal profitability of supplying and demanding additional units of the good. In particular in a competitive market equilibrium, equilibrium prices are then characterized by the equality of aggregate demand and supply.

Typically, all units of a specified good are traded in a market for the same (uniform) price. Uniform prices leave the market participants some rents from exchanging at fixed terms of trade, thus providing incentives for the voluntary engagement in trade. In competitive environments (see the entry on competitive market equilibrium), the free formation of prices leads to stationary market situations which even maximize the total gains from trade. More generally, equilibrium prices are characterized by the absence of incentives to change aggregate demand and aggregate supply for the particular good in question. Equilibrium prices for derivative financial assets, for example, are determined solely from the principle that no gains from trade are possible (no arbitrage principle); see the entry on option pricing.

Source: SFB 504

same as "stochastic discount factor" in a model of asset prices.

Source: econterms

A mapping from quantity purchased to total price paid

Source: econterms

A bond can be resold into parts that can be thought of as components: a principal component that is the right to receive the principal at the end date, and the right to receive the coupon payments. The components are called strips. The principal component is the principal strip.

Source: econterms

The general name for a class of games faced by a player, called the principal, who by the nature of the environment does not act directly but instead by giving incentives to other players, called agents, who may have different interests.

Source: econterms

A particular game-theoretic description of a situation. There is a player called a principal, and one or more other players called agents with utility functions that are in some sense different from the principal's. The principal can act more effectively through the agents than directly, and must construct incentive schemes to get them to behave at least partly according to the principal's interests. The principal-agent problem is that of designing the incentive scheme. The actions of the agents may not be observable so it is not usually sufficient for the principal just to condition payment on the actions of the agents.

Source: econterms

The basic principle of dynamic programming, which was developed by Richard Bellman: that an optimal path has the property that whatever the initial conditions and control variables (choices) over some initial period, the control (or decision variables) chosen over the remaining period must be optimal for the remaining problem, with the state resulting from the early decisions taken to be the initial condition.

Source: econterms

A classic game with two players. Imagine that the two players are criminals being interviewed separately by police. If either gives information to the police, the other will get a long sentence. Either player can Cooperate (with the other player) or Defect (by giving information to the police). Here is an example payoff matrix for a Prisoner's Dilemma game:

		Player Two
		C	D
Player One	C	3,3	0,4
	D	4,0	1,1

(D,D) is the Nash equilibrium, but (C,C) is the Pareto optimum. (That difference is often discussed extensively for various games in the research literature.) If this same game is repeated more than once with a high enough discount factor, there exist Nash equilibria in which (C,C) is a possible outcome of the early stages.

Source: econterms

Consider the following story. Two suspects in a crime are put into separate cells. If they both confess, each will be sentenced to three years. If only one of them confesses, he will be freed and used to witness against the other, who will receive a sentence of ten years. If neither confesses, they will both convicted of a minor offense and spend just a year in prison. This game is easily put in matrix form as a 2x2 game (see above). Once this is done, it is pretty obvious that each prisoner (player) has a dominant strategy to confess. The unique equilibrium of this game thus leads to the (Pareto) inefficient outcome (efficiency). This provides the most famous example that strategic equilibrium typically implies inefficient outcomes, and even can lead to the worst possible outcome (any other outcome is pareto-dominating the equilibrium outcome.) The prisoners' dilemma game illustrates the structure of interaction in an oil cartel, or any oligolistic industry of quantity competition, where each firm has an incentive to 'spoil' the market by unilaterally increasing its own output. The same structure of interaction characterizes the problem of providing public goods (free rider problem), i.e. of voluntarily paying taxes.

Source: SFB 504

describes a presentation of data, typically financial statements, where the data reflect the world on an 'as if' basis. That is, as if the state of the world were different from that which is in fact the case. For example, a pro forma balance sheet might show the balance sheet as if a debt issue under consideration had already been issued. A pro forma income statement might report the transactions of a group on the basis that a subsidiary acquired partway through the reporting period had been a part of the group for the whole period. This latter approach is often adopted in order to ensure comparability between financial statements of the year of acquisition with those of subsequent years.

Source: econterms

probability

Source: econterms

synonym for pdf.

Source: econterms

An econometric model in which the dependent variable y_i can be only one or zero, and the continuous indepdendent variable x_i are estimated in:
Pr(y_i=1)=F(x_i'b)
Here b is a parameter to be estimated, and F is the normal cdf. The logit model is the same but with a different cdf for F.

Source: econterms

see "stochastic process"

Source: econterms

This is a product market concept. Chamberlin (1933) defined it thus: 'A general class of product is differentiated if any significant basis exists for distinguishing the goods of one seller from those of another.'

Source: econterms

Describes a mapping from quantities of inputs to quantities of an output as generated by a production process. Standard example is:

y = f(x₁, x₂)

Where f() is the production function, the x's are inputs, and the y is an output quantity.

Source: econterms

A standard graph of the maximum amounts of two possible outputs that can be made from a given list of input resources.

A basic outline of how to draw one.

Source: econterms

The set of possible input and output combinations. Often put into the notation of netputs, so that this set can be defined by restrictions on a collection of vectors with the dimension of the number of goods, one element for each kind of good, and a positive or negative real quantity in each element.

Source: econterms

A measure relating a quantity or quality of output to the inputs required to produce it.

Often means labor productivity, which is can be measured by quantity of output per time spent or numbers employed. Could be measured in, for example, U.S. dollars per hour.

Source: econterms

Standard measures of labor productivity in the U.S. suggest that computers, at least until 1995, were not improving productivity. The paradox is the question: why, then, were U.S. employers investing more and more heavily in computers?

Resolving the paradox probably requires an understanding of the gap between what the productivity statistics measure and the goals of the U.S. organizations getting computers. Sichel (1990), pp 33-36 lists these six:

• the mismanagement hypothesis is that computers underestimate the costs of new computer technology, such as training, and therefore buy too many for optimum short-run profitability
• the redistribution hypothesis is that private rates of return on computers are high enough, but the effect is only to compete over business with other firms in the same industry, which does not overall show greater productivity; the analogy is to an arms race, in which both players invest heavily but the overall effect is not to increase security
• the long learning-lags hypothesis is that information technology will generate a substantial productivity effect when society is organized around its availability, but it is too soon for that
• the mismeasurement hypothesis is that national economic accounts do not tend to measure the services brought by information technology such as quality, variety, customization, and convenience
• the offsetting factors hypothesis is that other factors unrelated to computers have dragged down productivity measures
• the small share of computers in the capital stock hypothesis is just that computers are too small a share of plant and equipment to make a difference.

• the externalities hypothesis is that computers in organization A improve the long-run productivity of organization B but this is not attributable in the national accounts to the computers in A.
• the reorganization hypothesis is that computers in a firm do not raise much the quantity of capital stock but they cause a more productive long run organization of the capital stock within that firm and a more efficient split of tasks between that firm and other organizations.

Source: econterms

A mathematical derivation from axioms, often in principle in the form of a sequence of equations, each derived by a standard rule from the one above.

Source: econterms

An estimate of the probability that an observed entitiy like a person would undergo the treatment. This probability is itself a predictor of outcomes sometimes.

Source: econterms

Any limit of epsilon-proper equilibria as epsilon goes to zero. -- Myerson (1978), p 78

Source: econterms

Nominal revenues minus expenses for variable inputs including labor, purchased materials, and purchased services. Property income can serve as an approximation to the services rendered by capital. It contains the returns to national wealth. It can be thought to include technology and organizational components as well as 'pure' returns to capital.

Source: econterms

Kahneman & Tversky (1979) developed this theory to remedy the descriptive failures of subjectively expected utility (SEU) theories of decision making. Prospect theory attempts to describe decisions under uncertainty, and has also been applied to the field of social psychology. Like SEU-theories, prospect theory assumes that the value V of an option or alternative is calculated as the summed products over specified outcomes x. Each product consists of a utility v(x) and a weight w attached to the objective probability p of obtaining x. Thus the value V of an option is w(p) v(x).

Prospect theory differs from expected utility theory in a number of important respects. First, it differs from expected utility theory in the way it handles the probabilities attached to particular outcomes. Prospect theory treats preferences as a funcion of "decision weights", and it assumes that these weights do not always correspond to probabilities. Specifically, prospect theory postulates that decision weights tend to overweight small probabilities and underweight moderate and high probabilities.

Prospect theory also replaces the notion of "utility" with "value". Whereas utility is usually defined only in terms of net wealth, value is defined in terms of gains and losses (deviations from a reference point). The value function has a different shape for gains and losses. For losses it is convex and relatively steep, for gains it is concave and not quite so steep.

Based on these assumptions some deviations from normative theories can be explained like loss aversion, reflection effect or framing effect.

Source: SFB 504

The prototype or family resemblance view (Rosch & Mervis, 1975; Rosch, 1978) is one of five theories of conceptual structure in categorization (Komatsu, 1992). According to this view, people form summary representations - prototypes - that abstract across specific instances (e.g. several chairs) to give information about how members of the category, on average, are like. Other theories of conceptual structure are the classical view (Katz, 1972; Katz & Fodor, 1963), the exemplar view (Medin & Schaffer, 1978), the schema view and, most recently, the explanation-based or theory view (Johnson-Laird, 1983; Murphy & Medin, 1985).

Characteristics of the prototype view are:

Source: SFB 504

Also called Moore-Penrose inverse. The pseudoinverse of a matrix X always exists, is unique and satisfies four conditions shown on p 37 of Greene (93).

Perhaps the most important case is when there are more rows can columns, and X is of full column rank. Then the pseudoinverse of X is: (X'X)^-1X'. Notice how much this equation looks like the equation for the OLS estimator.

Source: econterms

Panel Study of Income Dynamics. Data set often used in labor economics studies. Data is from U.S. and is put together at the University of Michigan.
Since 1968 the PSID has followed and interviewed annually a national sample that began with about 5000 families. Low-income families were over-sampled in the original design. Interviews are usually conducted with the 'head' of each family.
Includes a lot of income and employment variables, and continues to track children who grow up and move out. For more information see the PSID's Web site at http://www.isr.mich.edu/src/psid/index.html

Source: econterms

public finance

Source: econterms

One of two ways to do the accounting for a U.S. firm after a merger. The alternative is the pooling of interests.

Source: econterms

A put hedge is a hedge strategy consisting of holding an underlying asset and simultaneously buying a put option (long put) of the same one. This combination leads to an asymmetric gain/loss position at the expiration date: on the one hand there is an effective hedge against losses and on the other hand it is possible to participate in the gains of the underlying asset, but reduced to the amount of the option price.

Source: SFB 504

A put option is a security which conveys the right to sell a specified quantity of an underlying asset at or before a fixed date.

Source: econterms

A relationship between the price of a put option and a call option on a stock according to a standard model.
Define:
r as the risk-free interest rate, constant over time, in an environment with no liquidity constraints
S as a stock's price
t as the current date
T as the expiration date of a put option and a call option
K as the strike price of the put option and call option
C(S,t) as the price of the call option when the current stock price is S and the current date is t
P(S,t) as the price of the put option when the current stock price is S and the current date is t
Then the relationship is:
P(S,t) = C(S,t) - S + Ke^-r(T-t)
The relationship is derived from the fact that combinations of options can make portfolios that are equivalent to holding the stock through time T, and that they must return exactly the same amount or an arbitrage would be available to traders.

Source: econterms

'A condition for the putting-out system to exist was for labor to be paid a piece wage, since working at home made the monitoring of time impossible.' -- Joel Mokyr, NU working paper: 'The rise and fall of the factory system: technology, firms, and households since the industrial revolution' Carnegie-Rochester Conference on macreconomics, Nov 17-19, 2000.

Source: econterms

As in Romer, JPE, Oct 1990. This describes an attribute of capital in some models. Putty-putty capital can be transformed into durable goods then back into general, flexible capital. This contrasts with putty-clay capital which if I understand correctly can be converted into durable goods but which cannot then be converted back into re-investable capital. The algebraic modeler chooses one of these to make an argument or arrive at a conclusion within the model. The term is not normally interpreted empirically although empirical analogues to each kind of capital exist.

Source: econterms