Utility Models and Prospect Theory
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Utility Models and Prospect Theory
2016-08-28
Random Expected Utility and Certainty Equivalents: Mimicry of Probability Weighting Functions
http://d.repec.org/n?u=RePEc:chu:wpaper:16-14&r=upt
For simple prospects of the kind routinely used for certainty equivalent elicitation, random expected utility preferences imply a conditional expectation function that can mimic deterministic rank dependent preferences. That is, an agent with random expected utility preferences can have mean certainty equivalents that look exactly like rank dependent probability weighting functions of the inverse-s shape discussed by Quiggin (1982) and later advocated by Tversky and Kahneman (1992) and other scholars. It seems that certainty equivalents cannot nonparametrically identify preferences, at least not in every relevant sense, since their conditional expectation depends on assumptions concerning the source and nature of their variability.
Nathaniel T. Wilcox
Random Expected Utility, Certainty Equivalents, Money Equivalents, Probability Weighting, Probability Weighting Function, Weighting Function
2016
Another Solution for Allais Paradox: Preference Imprecision, Dispersion and Pessimism
http://d.repec.org/n?u=RePEc:hhs:slucer:2016_012&r=upt
Although there are alternative models which can explain the Allais paradox with non-standard preferences, they do not take the emerging evidence on preference imprecision into account. The imprecision is so far incorporated into these models by adding a stochastic specification implying the errors that subjects make. However, there is also the inherent part of the preference imprecision which does not diminish with experience provided in repeated experiments and these stochastic specifications cannot explain a significant portion of the observed behavior in experiments. Moreover, evidence on imprecision suggests that subjects exhibit higher imprecision for a lottery with a higher variance. This paper presents a new model for decision under risk which takes into account the findings of the literature. Looking at the indifference curves predicted by the new model, the new model acts like a mixture of Expected Utility Theory and Rank Dependent Utility Theory depending on which part of the probability triangle the lottery is located.
Bayrak, Oben K.
Allais Paradox; Independence Axiom; Preference Imprecision; Anomalies; Decision Theory; Decision under Risk and Uncertainty; Alternative Models
2016-08-16
No need for more time: Intertemporal allocation decisions under time pressure
http://d.repec.org/n?u=RePEc:inn:wpaper:2016-24&r=upt
Time preferences drive decisions in many economic situations, such as investment contexts or salary negotiations. These situations are characterized by a very short time frame for decision making. Preferences are potentially susceptible to the confounding effects of time pressure, as proposed by dual-systems theory (Evans, 2006; Kahneman and Frederick, 2002). Results of standard methods of time preference elicitation can therefore not be directly mapped to environments characterized by severe time pressure since the underlying assumption of these models is that preferences are stable. To address the stability of time preferences under time pressure, we conduct a laboratory study with 144 subjects using convex time budgets (Andreoni and Sprenger, 2012) in order to elicit time preferences with and without time pressure in a within-subject design. We find lower present-bias under time pressure compared to the condition without time pressure on the aggregate, whereas utility function curvature and long-run discounting are stable across conditions. The findings are confirmed on the individual level. Embedding our results in dual-systems theory, how information is presented can serve as a potential means to exogenously decrease present-bias under time pressure.
Florian Lindner
Julia Rose
time preferences, time pressure, decision making, allocation decision, budget, experiment
2016-07
Risk Preferences and The Macro Announcement Premium
http://d.repec.org/n?u=RePEc:nbr:nberwo:22527&r=upt
The paper develops a theory for equity premium around macroeconomic announcements. Stock returns realized around pre-scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium during the 1961-2014 period, and virtually 100% of it during the later period of 1997-2014, where more announcement data are available. We provide a characterization theorem for the set of intertemporal preferences that generate a positive announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from expected utility and constitutes an asset market based evidence for a large class of non-expected models that features aversion to ”Knightian uncertainty”, for example, Gilboa and Schmeidler [30]. We also present a dynamic model to account for the evolution of equity premium around macroeconomic announcements.
Hengjie Ai
Ravi Bansal
2016-08
Collective Intertemporal Choice: the Possibility of Time Consistency
http://d.repec.org/n?u=RePEc:nbr:nberwo:22524&r=upt
Recent work on collective intertemporal choice suggests that non-dictatorial social preferences are generically time inconsistent. We argue that this claim conflates time consistency with two distinct properties of preferences: stationarity and time invariance. While the conjunction of time invariance and stationarity implies time consistency, the converse does not hold. Although social preferences cannot be stationary, they may be time consistent if time invariance is abandoned. If individuals are discounted utilitarians, revealed preference provides no guidance on whether social preferences should be time consistent or time invariant. Nevertheless, we argue that time invariant social preferences are often normatively and descriptively problematic.
Antony Millner
Geoffrey Heal
2016-08
Strategic Ambiguity and Decision-making: An Experimental Study
http://d.repec.org/n?u=RePEc:exe:wpaper:1605&r=upt
We conducted a set of experiments to compare the effect of ambiguity in single person decisions and games. Our results suggest that ambiguity has a bigger impact in games than in ball and urn problems. We ?nd that ambiguity has the opposite effect in games of strategic substitutes and complements. This con?rms a theoretical prediction made by Eichberger and Kelsey (2002). The experiments also test whether subjects' ?perception of ambiguity differs when faced by a local opponent as opposed to a foreign one. Our results show that there is little evidence of more in?uence of ambiguity on behaviour when faced by foreign subjects.
David Kelsey
Sara le Roux
Ambiguity; Choquet expected utility; strategic complements; strategic substitutes; Ellsberg urn.
2016
Value Bounds and Best Response Violations in Discriminatory Share Auctions
http://d.repec.org/n?u=RePEc:bsl:wpaper:2015/14&r=upt
This paper analyzes a discriminatory share auction in which bidders submit non-increasing step functions with a bounded number of steps, the type space consists of private non-increasing marginal valuation functions, and the number of participants is random. I show that the interim utility can be written as a simple functional of the distribution of the allocated quantity. This allows me to derive equilibrium existence and to give a characterization of the equilibrium bid schedules in terms of the individual bidders' optimality conditions. The characterization facilitates the formulation of bounds on the estimates of marginal valuations between the submitted quantity points and permits a simple estimator of the fraction of best response violations among the submitted bids. Proofs of concept for the bounds and the estimator are given by using a novel data set from meat import quota auctions in Switzerland.
Samuel Häfner
Discriminatory Share Auctions, Random Participation, Estimation
2015
Gender and Redistribution: Experimental Evidence
http://d.repec.org/n?u=RePEc:tin:wpaper:20160063&r=upt
Gender differences in voting patterns and political attitudes towards redistribution are well-documented. The experimental gender literature suggests several plausible behavioral explanations behind these differences, relating to gender differences in confidence concerning future relative income position, risk aversion, and social preferences. We use data from lab experiments on preferences for redistribution conducted in the U.S. and several European countries to disentangle these potential mechanisms. We find that when choosing to redistribute income as a disinterested observer, women choose higher tax rates than men when initial income depends on performance in a task but not when it is randomly allocated. In a veil of ignorance condition with uncertainty about the income position of the decision maker, this effect is even stronger, leading to a 10ppt gender difference in average chosen tax rates in the performance conditions. We find that this gender difference is mainly due to men being more (over)confident about their task performance and the resulting income position, with gender differences in risk aversion and social preferences playing a minor role.
Thomas Buser
Louis Putterman
Joël van der Weele
gender; redistribution; overconfidence; risk attitudes; voting; taxation
2016-08-23
Axioms for Salience Perception
http://d.repec.org/n?u=RePEc:chu:wpaper:16-15&r=upt
Models of salience-based choice have become popular in recent years, although there is still no known set of simple conditions or axioms which implies the existence of a salience function. In this paper, we provide simple and natural axioms that characterize the general class of salience functions. As an application we consider a salience-based model of decision making and show that within that setup the fourfold pattern of risk attitudes is a general property of a salience function and that the properties producing that pattern also account for other anomalies involving risky and intertemporal choice.
Jonathan W. Leland
Mark Schneider
Jonathan Leland
Salience; Diminishing Sensitivity; Fourfold Pattern of Risk Attitudes
2016
Optimal Switching under Ambiguity and Its Applications in Finance
http://d.repec.org/n?u=RePEc:arx:papers:1608.06045&r=upt
In this paper, we study optimal switching problems under ambiguity. To characterize the optimal switching under ambiguity in the finite horizon, we use multidimensional reflected backward stochastic differential equations (multidimensional RBSDEs) and show that a value function of the optimal switching under ambiguity coincides with a solutions to multidimensional RBSDEs with allowing negative switching costs. Furthermore, we naturally extend the finite horizon problem to the infinite horizon problem. In some applications, we show that ambiguity affects an optimal switching strategy with the different way to a usual switching problem without ambiguity.
Yuki Shigeta
2016-08
Strategic Growth with Recursive Preferences: Decreasing Marginal Impatience
http://d.repec.org/n?u=RePEc:arx:papers:1608.06959&r=upt
We study the interaction between strategy, heterogeneity and growth in a two-agent model of capital accumulation. Preferences are represented by recursive utility functions with decreasing marginal impatience. The stationary equilibria of this dynamic game are analyzed under two alternative information structures: one in which agents precommit to future actions, and another one where agents use Markovian strategies. In both cases, we develop sufficient conditions to prove the existence of equilibria and characterize their stability properties. The precommitment case is characterized by monotone convergence, but Markovian equilibria may exhibit nonmonotonic paths, even in the long-run.
Luis Alcala
Fernando Tohme
Carlos Dabus
2016-08
Consumer choice under limited attention when options have different information costs
http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-16-04&r=upt
Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers have to trade-off the value of better information against its cost, and make their final choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumerâ€™s choice behavior when she faces options with different information costs. To this end, we introduce an information cost function that distinguishes between direct and inferential information. We then analytically characterize the optimal behavior and derive the choice probabilities in closed-form. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. It can also lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product. Furthermore, it provides a new explanation for strong failure of regularity of consumer behaviour, which occurs if the addition of an inferior â€“ never chosen â€“ product to the choice set increases the market share of another existing product.
Frank Huettner,
Tamer BoyacÄ±,
Yalçın Akçay
discrete choice, rational inattention, information acquisition, non-uniform information costs, strong failure of regularity
2016-08-18