Utility Models and Prospect Theory
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Utility Models and Prospect Theory
2016-04-23
Dynamic decision making under ambiguity
http://d.repec.org/n?u=RePEc:lan:wpaper:112111041&r=upt
Neoclassical economic theory assumes that when agents tackle dynamic decisions under ambiguity, preferences are represented by Expected Utility and prior beliefs are updated according to Bayes rule, upon the arrival of partial information. Nevertheless, when one considers non-neutral ambiguity attitudes, either the axiom of dynamic consistency or of consequentialism should be relaxed. We report the results of a new experiment, designed to investigate how people behave in a dynamic choice problem under ambiguity, where decisions are made both before and after the resolution of some uncertainty. We study which of the two rationality axioms people violate, along with the question of whether this violation is part of a conscious planning strategy or not. The combination of the two, allows us to classify subjects to three behavioural types: resolute, naïve and sophisticated. Using data from a portfolio choice experiment where ambiguity is represented in a transparent and non-manipulable way, we cannot reject the hypothesis of Bayesian updating for half of our experimental population. For ambiguity non-neutral subjects, we find that the majority are sophisticated, a few are naïve and few are resolute.
Konstantinos Georgalos
Ambiguity, Subjective Beliefs, Dynamic Consistency, Consequentialism, Portfolio Choice, Experiment
2016
Credit Market Segmentation, Essentiality of Commodities, and Supermodularity
http://d.repec.org/n?u=RePEc:udc:wpaper:wp420&r=upt
We consider incomplete market economies where agents are subject to price-dependent trading constraints compatible with credit market segmentation. Equilibrium existence is guaranteed when either commodities are essential, i.e, indifference curves through individuals' endowments do not intersect the boundary of the consumption set, or utility functions are concave and supermodular. Since we do not require the smoothness of mappings representing preferences, financial promises, or trading constraints, our approach is compatible with the existence of ambiguity-adverse agents, non-recourse collateralized loans, or income-dependent thresholds determining the access to credit.
Marta Faias
Juan Pablo Torres-Martinez
2016-03
Multivariate Stochastic Dominance for Risk Averters and Risk Seekers
http://d.repec.org/n?u=RePEc:pra:mprapa:70637&r=upt
This paper first extends some well-known univariate stochastic dominance results to multivariate stochastic dominances (MSD) for both risk averters and risk seekers, respectively, to n order for any n ≥ 1 when the attributes are assumed to be independent and the utility is assumed to be additively and separable. Under these assumptions, we develop some properties for MSD for both risk averters and risk seekers. For example, we prove that MSD are equivalent to the expected-utility maximization for both risk averters and risk seekers, espectively. We show that the hierarchical relationship exists for MSD. We establish some dual relationships between the MSD for risk averters and risk seekers. We develop some properties for non-negative combinations and convex combinations random variables of MSD and develop the theory of MSD for the preferences of both risk averters and risk seekers on diversification. At last, we discuss some MSD relationships when attributes are dependent and discuss the importance and the use of the results developed in this paper.
Guo, Xu
Wong, Wing-Keung
Multivariate Stochastic Dominance, Risk Averters, Risk Seekers, Ascending stochastic dominance, descending stochastic dominance, utility function
2016-04-11
Bounded Rationality and Correlated Equilibria
http://d.repec.org/n?u=RePEc:urv:wpaper:2072/260959&r=upt
We study an interactive framework that explicitly allows for nonrational behavior. We do not place any restrictions on how players' behavior deviates from rationality. Instead we assume that there exists a probability p such that all players play rationally with at least probability p, and all players believe, with at least probability p, that their opponents play rationally. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary probability p. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to derive a measure p that bounds from below the probability with which any given player chooses actions consistent with payoff maximization and common knowledge of payoff maximization. Keywords: strategic interaction, correlated equilibrium, robustness to bounded rationality, approximate knowledge, incomplete information, measure of rationality, experiments. JEL Classification: C72, D82, D83.
Germano, Fabrizio
Zuazo-Garin, Peio
Jocs no-cooperatius (Matemàtica), Teoria de la informació (Economia), 33 - Economia,
2015
Household production and the Elasticity of Marginal Utility of Consumption
http://d.repec.org/n?u=RePEc:hhs:ctswps:2016_010&r=upt
Chetty (2006) developed a new method of estimating the Elasticity of Marginal Utility of Consumption (EMUC) from observed work time responses to wage changes and derived an upper bound of 2 for this parameter. Here I show that the omission of household production in Chetty’s model may lead to bias, and perform a numerical sensitivity analysis of Chetty’s results in this respect. I develop a new model that includes household production from which I derive new, unbiased EMUC formulas. I offer empirical estimates based on current evidence of the included parameters, suggesting a lower bound for EMUC of about 0.9.
Thureson, Disa
Elasticity of marginal utility of consumption; Household production; Labor supply; Coefficient of relative risk aversion; Consumer behavior
2016-03-29
Pareto Optimality and Indeterminacy of General Equilibrium under Knightian Uncertainty
http://d.repec.org/n?u=RePEc:pre:wpaper:201621&r=upt
This paper studies general equilibrium theory, for both complete and incomplete markets, under Knightian uncertainty. Noting that the preference represented by Knightian uncertainty induces a set of complete preferences, we set ourselves the task of inquiring the relationship between an equilibrium under Knightian uncertainty and its counterpart under the induced complete preferences. It is shown that they are actually equivalent. The importance of this result is due to its applications, among which the existence of equilibria under Knightian uncertainty and their computation follow at once from the existing knowledge on general equilibrium theory under complete preferences. Moreover, by means of that equivalence, we are in a position to investigate the problem of efficiency and indeterminacy of equilibria under Knightian uncertainty.
Wei Ma
General equilibrium, Knightian uncertainty, Pareto optimality
2016-03
Multidimensional matching
http://d.repec.org/n?u=RePEc:arx:papers:1604.05771&r=upt
We present a general analysis of multidimensional matching problems with transferable utility, paying particular attention to the case in which the dimensions of heterogeneity on the two sides of the market are unequal. A particular emphasis is put on problems where agents on one side of the market are multidimensional and agents on the other side are uni-dimensional, we describe a general approach to solve such problems. Lastly, we analyze several examples, including an hedonic model with differentiated products, a marriage market model where wives are differentiated in income and fertility, and a competitive variation of the Rochet-Chon\'e problem. In the latter example, we show that the bunching phenomena, observed by Rochet and Chon\'e in the monopoly context, do not occur in the competitive context
Pierre-Andr\'e Chiappori
Robert McCann
Brendan Pass
2016-04
Why Do People Overwork at the Risk of Impairing Mental Health?
http://d.repec.org/n?u=RePEc:eti:dpaper:16037&r=upt
Using longitudinal data of Japanese workers, this study investigates the relationship between overwork and mental health. Conventional labor supply theory assumes that people allocate their hours of work and leisure to maximize personal utility. However, people sometimes work too long (overwork) and, by doing so, impair their physical and/or mental health. We introduce non-pecuniary factors into the conventional utility function. Empirical analysis reveals a non-linear relationship between the number of hours worked and job satisfaction. We find that job satisfaction rises when people work more than 55 hours weekly. However, we also find that hours worked linearly erode workers' mental health. These findings imply that people who overvalue job satisfaction work excessive hours and, as a consequence, damage their mental health. We find that people form incorrect beliefs about the mental health risks of overwork, leading them to work longer hours. These results might justify interventions, such as capping the number of hours worked to reduce related mental issues.
KURODA Sachiko
YAMAMOTO Isamu
2016-03
Gains from Variety? Product Differentiation and the Possibility of Losses from Trade under Cournot Oligopoly with Free Entry
http://d.repec.org/n?u=RePEc:cdf:wpaper:2016/3&r=upt
In a free-entry Cournot oligopoly model with a quadratic utility function that yields differentiated products, it is shown that there are losses from trade when the trade cost is close to the prohibitive level. Although the total number of varieties increases, there is a reduction in consumer surplus. This occurs because trade leads to an increase in imported varieties where consumer surplus is low due to the high trade cost and a decrease in domestically-produced varieties where consumer surplus is high. This result is in contrast with results from the free-entry Cournot oligopoly models with homogeneous products of Brander and Krugman (1983) and Venables (1985); the monopolistic competition models such as Krugman (1980) and Venables (1987), and heterogeneous firm models such as Melitz (2003) and Melitz and Ottaviano (2008).
Collie, David R.
Gains from Trade; Trade Liberalisation; Free Entry; Cournot Oligopoly; Product Variety
2016-04
Willingness to Pay or Willingness to Accept: Determining the Appropriate Welfare Measure when Preferences are Reference-Dependent
http://d.repec.org/n?u=RePEc:eep:report:rr20160325&r=upt
Phumsith Mahasuweerachai
Jack L. Knetsch
Willingness to Pay,Willingness to Accept,Welfare Measure,Preferences
2016-03
Volatility and Growth with Recursive Preferences
http://d.repec.org/n?u=RePEc:rim:rimwps:16-05&r=upt
This paper studies the relationship between volatility and long-run growth in a complete market economy with human capital accumulation and Epstein-Zin preferences. There is both cross-country and time-series evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrizations of preferences in line with the literature.
Barbara Annicchiarico
Alessandra Pelloni
Fabrizio Valenti
2016-04
Blanchard and Kahn’s (1980) solution for a linear rational expectations model with one state variable and one control variable: the correct formula
http://d.repec.org/n?u=RePEc:pra:mprapa:70338&r=upt
This note corrects Blanchard and Kahn’s (1980) solution for a linear dynamic rational expectations model with one state variable and one control variable.
Kollmann, Robert
Zeugner, Stefan
linear dynamic rational expectations model, model solution
2016