Utility Models and Prospect Theory
http://lists.repec.org/mailman/listinfo/nep-upt
Utility Models and Prospect Theory
2020-09-14
Risk Aversion and Optimal Hedge Ratio in Commodities Futures Markets
http://d.repec.org/n?u=RePEc:hal:journl:hal-02922890&r=upt
In this paper, our main objective is to show that the determination of the optimal hedge ratio for a raw material producer, who is submitted to income risk, depends on the type of its utility function. More precisely, we maximize the expected utility of wealth for the following four utility functions : quadratic, exponential, power and expo-power. We then derive an explicit formula of the optimal hedge ratio when using the first two functions and an implicit function when the agent's preferences are modeled by power or expo-power utility functions. The results obtained are then applied to data on quantity and prices collected from the NCCB and ICCO from 1980 to 2013. The implementation with some Matlab programs provides the estimated value of the optimal hedge ratio for a Cameroonian cocoa producer around 80% for quadratic and exponential utility functions, and 87.9% for power utility and between 50% and 65% for the expo-power utility function.
Willy Kamdem
Willy Domtchueng Kamdem
David Kamdem
Louis Aimé Fono
2020
Lindahl Equilibrium as a Collective Choice Rule
http://d.repec.org/n?u=RePEc:arx:papers:2008.09932&r=upt
A collective choice problem is a finite set of social alternatives and a finite set of economic agents with vNM utility functions. We associate a public goods economy with each collective choice problem and establish the existence and efficiency of (equal income) Lindahl equilibrium allocations. We interpret collective choice problems as cooperative bargaining problems and define a set-valued solution concept, {\it the equitable solution} (ES). We provide axioms that characterize ES and show that ES contains the Nash bargaining solution. Our main result shows that the set of ES payoffs is the same a the set of Lindahl equilibrium payoffs. We consider two applications: in the first, we show that in a large class of matching problems without transfers the set of Lindahl equilibrium payoffs is the same as the set of (equal income) Walrasian equilibrium payoffs. In our second application, we show that in any discrete exchange economy without transfers every Walrasian equilibrium payoff is a Lindahl equilibrium payoff of the corresponding collective choice market. Moreover, for any cooperative bargaining problem, it is possible to define a set of commodities so that the resulting economy's utility possibility set is that bargaining problem {\it and} the resulting economy's set of Walrasian equilibrium payoffs is the same as the set of Lindahl equilibrium payoffs of the corresponding collective choice market.
Faruk Gul
Wolfgang Pesendorfer
2020-08
On the (ir)relevance of monetary incentives in risk preference elicitation experiments
http://d.repec.org/n?u=RePEc:zbw:safewp:286&r=upt
Incentivized experiments in which individuals receive monetary rewards according to the outcomes of their decisions are regarded as the gold standard for preference elicitation in experimental economics. These task-related real payments are considered necessary to reveal subjects' "true preferences". Using a systematic, large-sample approach with three subject pools of private investors, professional investors, and students, we test the effect of task-related monetary incentives on risk preferences elicited in four standard experimental tasks. We find no systematic differences in behavior between subjects in the incentivized and non-incentivized regimes. We discuss implications for academic research and for applications in the field.
Hackethal, Andreas
Kirchler, Michael
Laudenbach, Christine
Razen, Michael
Weber, Annika
Experimental Economics,Incentives,Risk Aversion,Risk Preferences
2020
Deciding what to replicate: A formal definition of “replication value” and a decision model for replication study selection.
http://d.repec.org/n?u=RePEc:osf:metaar:2gurz&r=upt
Robust scientific knowledge is contingent upon replication of original findings. However, researchers who conduct replication studies face a difficult problem; there are many more studies in need of replication than there are funds available for replicating. To select studies for replication efficiently, we need to understand which studies are the most in need of replication. In other words, we need to understand which replication efforts have the highest expected utility. In this article we propose a general rule for study selection in replication research based on the replication value of the claims considered for replication. The replication value of a claim is defined as the maximum expected utility we could gain by replicating the claim, and is a function of (1) the value of being certain about the claim, and (2) uncertainty about the claim based on current evidence. We formalize this definition in terms of a causal decision model, utilizing concepts from decision theory and causal graph modeling. We discuss the validity of using replication value as a measure of expected utility gain, and we suggest approaches for deriving quantitative estimates of replication value.
Isager, Peder Mortvedt
van Aert, Robbie Cornelis Maria
Bahník, Štěpán
Brandt, Mark John
DeSoto, Kurt Andrew
Giner-Sorolla, Roger
Krueger, Joachim
Perugini, Marco
Ropovik, Ivan
van 't Veer, Anna Elisabeth
2020-09-02
Second-Order Beliefs and Second-Order Expected Utility
http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02922263&r=upt
We present an axiomatization of the Second-Order Expected Utility model in the environment of Anscombe and Aumann (1963) where the domain of the preference relation is the set of lotteries over all acts whose prize are lotteries. We replace the axiom of reversal of order in compound lotteries (Assumption 1 in Anscombe and Aumann (1963)) by an extension of monotonicity in the prizes (Assumption 2 in Anscombe and Aumann (1963)) that is a strengthening of the Dominance axiom introduced by Seo (2009). This extends the contributions of Grant et al. (2009) by allowing for a general representation result without restricting the decision maker's attitude towards subjective uncertainty.
V. Filipe Martins-Da-Rocha
Rafael Mouallem
2020-08-26
Competing Persuaders in Zero-Sum Games
http://d.repec.org/n?u=RePEc:arx:papers:2008.08517&r=upt
We study a Bayesian Persuasion game with multiple senders employing conditionally independent experiments. Senders have zero-sum preferences over what information is revealed. We characterize when a set of states cannot be pooled in any equilibrium, and in particular, when the state is (fully) revealed in every equilibrium. The state must be fully revealed in every equilibrium if and only if sender utility functions are sufficiently nonlinear. In the binary-state case, the state is fully revealed in every equilibrium if and only if some sender has nontrivial preferences. Our takeaway is that `most' zero-sum sender preferences result in full revelation.
Dilip Ravindran
Zhihan Cui
2020-08
Deep Learning for Constrained Utility Maximisation
http://d.repec.org/n?u=RePEc:arx:papers:2008.11757&r=upt
This paper proposes two algorithms for solving stochastic control problems with deep reinforcement learning, with a focus on the utility maximisation problem. The first algorithm solves Markovian problems via the Hamilton Jacobi Bellman (HJB) equation. We solve this highly nonlinear partial differential equation (PDE) with a second order backward stochastic differential equation (2BSDE) formulation. The convex structure of the problem allows us to describe a dual problem that can either verify the original primal approach or bypass some of the complexity. The second algorithm utilises the full power of the duality method to solve non-Markovian problems, which are often beyond the scope of stochastic control solvers in the existing literature. We solve an adjoint BSDE that satisfies the dual optimality conditions. We apply these algorithms to problems with power, log and non-HARA utilities in the Black-Scholes, the Heston stochastic volatility, and path dependent volatility models. Numerical experiments show highly accurate results with low computational cost, supporting our proposed algorithms.
Ashley Davey
Harry Zheng
2020-08
Consumer Inequality Aversion and Risk Preferences in Community Supported Agriculture
http://d.repec.org/n?u=RePEc:hal:journl:hal-02541728&r=upt
In community-supported agriculture (CSA), consumers face a tradeoff between (i.) the desire to support a CSA farmer and obtain environmentally-friendly goods and (ii.) the risk associated with a long-term commitment. We elicit inequality aversion and risk preferences of a sample of 162 French CSA consumers using incen-tivized field experiments. We find that CSA consumers are concerned about payoff inequalities. While we obtain evidence of advantageous inequality aversion toward CSA farmers, we also find disadvantageous inequality seeking. We find that CSA consumers are risk averse and loss averse and distort probabilities. We also observe that inequality and risk preferences in the loss domain might complement each other to strengthen consumers' support for CSA farmers.
Kévin Bernard
Aurélie Bonein
Douadia Bougherara
Community supported agriculture,Field experiment,Risk aversion,Inequality aversion preferences
2020
When nudges fail to scale: Field experimental evidence from goal setting on mobile phones
http://d.repec.org/n?u=RePEc:zbw:cawmdp:118&r=upt
Non-pecuniary incentives motivated by insights from psychology ("nudges") have been shown to be effective tools to change behavior in a variety of fields. An often unanswered question relevant for public policy is whether these promising interventions can be scaled up. In cooperation with a large public utility in Germany, we develop an energy savings application for mobile phones that can be used by the majority of the population. The app randomizes a goal-setting nudge prompting users to set themselves energy consumption targets. The roll-out of the app is promoted by a mass-marketing campaign and large financial incentives. Results document low demand for the energy app in the general population and a tightly estimated null effect of the nudge on electricity consumption among app users. A likely mechanism of the null effect is unfavorable self-selection into the app: users are characterized by an already low baseline energy consumption and exhibit none of the behavioral biases that typically explain why goal setting affects behavior. We also find that the nudge significantly decreases the likelihood to use the app over time. Structural estimates imply that the average user is willing to pay 7.41 EUR to avoid the nudge and the intervention would yield substantial welfare losses if implemented nationwide.
Löschel, Andreas
Rodemeier, Matthias
Werthschulte, Madeline
nudging,goal setting,scalability,field experiments,energy,behavioral welfare economics,mobile phones
2020
Ambiguity Preferences and Portfolio Choices
http://d.repec.org/n?u=RePEc:hal:pseptp:hal-02923452&r=upt
We match administrative panel data on portfolio choices with survey data on preferences over ambiguity. We show that ambiguity averse investors bear more risk, due to a lack of diversification. In particular, they exhibit a form of home bias that leads to higher exposure to the domestic relative to the international stock market. While more sensitive to market factors, their returns are on average higher, suggesting that ambiguity averse investors need not be driven out of the market for risky assets. We also show that these investors rebalance their portfolio more actively and in a contrarian direction relative to past market trends, which allow them to keep their risk exposure relatively constant over time. We discuss these findings in relation to the theoretical literature on portfolio choice under ambiguity.
Milo Bianchi
Jean-Marc Tallon
2019-04
Propensity to Consume and the Optimality of Ramsey-Euler Policies
http://d.repec.org/n?u=RePEc:smu:ecowpa:2007&r=upt
In a general one-sector optimal stochastic growth model where the production technology may be globally unproductive or may allow for unbounded growth, a policy function satisfying the Ramsey-Euler condition may not be optimal even if consumption and investment are continuous and increasing in output. We outline verifiable sufficient conditions for optimality that do not require checking the transversality condition. In addition to continuity (or monotonicity), these conditions impose lower bounds on the propensity to consume. In the case of production functions with multiplicative shocks, the consumption propensity needs to be bounded away from zero; a similar condition is sufficient for more general production functions if the utility function belongs to a restricted class.
Tapan Mitra
Santanu Roy
Stochastic growth, optimal economic growth, uncertainty, unbounded growth, unproductive technology, transversality condition, optimality conditions, Euler equation.
2020-06
Understanding Gambling Behavior and Risk Attitudes Using Cryptocurrency-based Casino Blockchain Data
http://d.repec.org/n?u=RePEc:arx:papers:2008.05653&r=upt
The statistical concept of Gambler's Ruin suggests that gambling has a large amount of risk. Nevertheless, gambling at casinos and gambling on the Internet are both hugely popular activities. In recent years, both prospect theory and lab-controlled experiments have been used to improve our understanding of risk attitudes associated with gambling. Despite theoretical progress, collecting real-life gambling data, which is essential to validate predictions and experimental findings, remains a challenge. To address this issue, we collect publicly available betting data from a \emph{DApp} (decentralized application) on the Ethereum Blockchain, which instantly publishes the outcome of every single bet (consisting of each bet's timestamp, wager, probability of winning, userID, and profit). This online casino is a simple dice game that allows gamblers to tune their own winning probabilities. Thus the dataset is well suited for studying gambling strategies and the complex dynamic of risk attitudes involved in betting decisions. We analyze the dataset through the lens of current probability-theoretic models and discover empirical examples of gambling systems. Our results shed light on understanding the role of risk preferences in human financial behavior and decision-makings beyond gambling.
Jonathan Meng
Feng Fu
2020-08
Modelling the expected probability of correct assignment under uncertainty
http://d.repec.org/n?u=RePEc:arx:papers:2008.05878&r=upt
When making important decisions such as choosing health insurance or a school, people are often uncertain what levels of attributes will suit their true preference. After choice, they might realize that their uncertainty resulted in a mismatch: choosing a sub-optimal alternative, while another available alternative better matches their needs. We study here the overall impact, from a central planner's perspective, of decisions under such uncertainty. We use the representation of Voronoi tessellations to locate all individuals and alternatives in an attribute space. We provide an expression for the probability of correct match, and calculate, analytically and numerically, the average percentage of matches. We test dependence on the level of uncertainty and location. We find overall considerable mismatch even for low uncertainty - a possible concern for policy makers. We further explore a commonly used practice - allocating service representatives to assist individuals' decisions. We show that within a given budget and uncertainty level, the effective allocation is for individuals who are close to the boundary between several Voronoi cells, but are not right on the boundary.
Tom Dvir
Renana Peres
Ze\'ev Rudnick
2020-08
Behavioral Welfare Economics and Risk Preferences: A Bayesian Approach
http://d.repec.org/n?u=RePEc:nbr:nberwo:27685&r=upt
We propose the use of Bayesian estimation of risk preferences of individuals for applications of behavioral welfare economics to evaluate observed choices that involve risk. Bayesian estimation provides more systematic control of the use of informative priors over inferences about risk preferences for each individual in a sample. We demonstrate that these methods make a difference to the rigorous normative evaluation of decisions in a case study of insurance purchases. We also show that hierarchical Bayesian methods can be used to infer welfare reliably and efficiently even with significantly reduced demands on the number of choices that each subject has to make. Finally, we illustrate the natural use of Bayesian methods in the adaptive evaluation of welfare.
Xiaoxue Sherry Gao
Glenn W. Harrison
Rusty Tchernis
2020-08
Mobility and Social Efficiency
http://d.repec.org/n?u=RePEc:arx:papers:2008.07650&r=upt
This is a general competitive analysis paper. A model is presented that describes how an individual with a physical disability, or mobility impairment, would go about utility maximization. These results are then generalized. Subsequently, a selection of disability policies from Canada and the United States are compared to the insights of the model, and it is shown that there are sources of inefficiency in many North American disability support systems.
Ryan Steven Kostiuk
2020-08
Higher Order Risk Preferences: New Experimental Measures, Determinants and Field Behavior
http://d.repec.org/n?u=RePEc:ajk:ajkdps:026&r=upt
We use a novel method to elicit and measure higher order risk preferences (prudence and temperance) in an experiment with 658 adolescents. In line with theoretical predictions, we find that higher order risk preferences - particularly prudence - are strongly related to adolescents' field behavior, including their financial decision making, eco-friendly behavior, and health status, including addictive behavior. Most importantly, we show that dropping prudence and temperance from the analysis of students' field behavior would yield largely misleading conclusions about the relation of risk aversion to these domains of field behavior. Thus our paper puts previous work that ignored higher order risk preferences into an encompassing perspective and clarifies which orders of risk preferences can help understand field behavior of adolescents.
Sebastian O.Schneider
Matthias Sutter
Higher order risk preferences, prudence, temperance, risk aversion, field behavior, adolescents, health, addictive behavior, smartphone addiction, experiment
2020-08
Financial Literacy, Risk and Time Preferences: Results from a Randomized Educational Intervention
http://d.repec.org/n?u=RePEc:iza:izadps:dp13566&r=upt
We present the results of a randomized intervention in schools to study how teaching financial literacy affects risk and time preferences of adolescents. Following more than 600 adolescents, aged 16 years on average, over about half a year, we provide causal evidence that teaching financial literacy has significant short-term and longer-term effects on risk and time preferences. Compared to two different control treatments, we find that teaching financial literacy makes subjects more patient, less present-biased, and slightly more risk-averse. Our finding that the intervention changes economic preferences contributes to a better understanding of why financial literacy has been shown to correlate systematically with financial behavior in previous studies. We argue that the link between financial literacy and field behavior works through economic preferences. In our study, the latter are also related in a meaningful way to students' field behavior.
Sutter, Matthias
Weyland, Michael
Untertrifaller, Anna
Froitzheim, Manuel
time preferences, risk preferences, randomized intervention, financial literacy, field experiment
2020-08
Lottery "strategies": monetizing players' behavioral biases
http://d.repec.org/n?u=RePEc:war:wpaper:2020-29&r=upt
The popularity of lotteries around the world is puzzling. In this paper, we study one factor, which might contribute to this phenomenon, namely lottery “strategies” that could allegedly improve players’ odds. In an online survey of lottery players we find that such strategies are popular and their use is related to more frequent lottery play and a number of personality traits and beliefs about gambling. Systematically searching for websites and books, we amass the largest dataset of lottery strategies in existence. We subsequently analyze their descriptions, categorize them, and investigate how they exploit their target audience’s behavioral biases, including the illusion of control, authority bias, magical thinking, the illusion of correlation, gambler’s fallacy, hot hand fallacy, representativeness heuristic, availability heuristic, and regret aversion. We find that the strategies maintain gamblers’ (false) beliefs about the possibility of controlling lottery results. This exploratory work contributes to a deeper understanding of (problem) gambling and lays the foundation for the design of experiments testing how the specific features of different strategies may interact with beliefs and trigger (excessive) lottery play.
Raman Kachurka
Michał Wiktor Krawczyk
decision making under risk, lottery strategy, illusion of control
2020