nep-upt New Economics Papers
on Utility Models and Prospect Theories
Issue of 2006‒03‒25
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Worst Case Portfolio Optimization and HJB-Systems By Ralf Korn; Mogens Steffensen
  2. Nested identification of subjective probabilities By Jacques H. , DREZE
  3. On Intertemporal Dependent Preferences with regard Environmental Goods and Services By José Manuel Madeira Belbute
  4. Habit in Pollution. A Challenge for Intergenerational Equity By Ingmar, SCHUMACHER; Benteng, ZOU
  5. Farmer willingness to pay for seed-related information By Horna, J. Daniela; Smale, Melinda; von Oppen, Matthias
  6. On the effect of risk aversion in two-person, two-state finance economies By Berden Caroline; Peters Hans
  7. Native-Migrant Differences in Risk Attitudes By Holger Bonin; Amelie Constant; Konstantinos Tatsiramos; Klaus F. Zimmermann
  8. Optimal Dynamic Risk Sharing when Enforcement is a Decision Variable By Thorsten Koeppl
  9. On Initial Conferment of Individual Rights By Kotaro Suzumura; Naoki Yoshihara
  10. Explorations of the Effect of Experience on Preferences: Two Health-Care Case Studies By Einat Neuman; Shoshana Neuman

  1. By: Ralf Korn (Fachbereich Mathematik, Universität Kaiserslautern); Mogens Steffensen (Department of Applied Mathematics and Statistics, University of Copenhagen)
    Abstract: We formulate a portfolio optimization problem as a game where the investor chooses a portfolio and his opponent, the market, chooses some market crashes. The asymmetry of the opponents' decision processes leads to a new and delicate generalization of the classical Hamilton-Jacob-Bellman equation in stochastic control. We characterize the optimal controls in general and specify them further in the cases of HARA, logarithmic, and exponential utility of the investor.
    Keywords: continuous-time game; asymmetric decisions; market crash; utility optimization
  2. By: Jacques H. , DREZE
    Abstract: The theory of games against nature relies on complete preferences among all conceivable acts, i.e. among all potential assignments of consequeces to states of nature (case 1). Yet most decision problems call for choosing an element from a limited set of acts. And in games of strategy, the set of strategies available to a player is givent and not amenable to artificial extensions. In “Assessing Strategic Risk”,(ECON DP 2005-20) R.J. Aumann and J.H. Drèze extend the basic result of decision theory (maximisation of subjectvely expected utility) to situations where preferences are defined only for a given set of acts, and for lotteries among these and sure consequences (case 2). In this paper, we provide a similar extension for two other situations : those where only the set of optimal elements from a given set of acts is known (case 3); and those where only a single optimal act is known (case 4). To these four cases correspond four nested sets of admissible subjective probabilities over the states or the opponent’s strategies, namely a singleton in case 1 and increasing sets in cases 2-4. The results for case 3 and 4 also define the extent to which subjective probabilities must be specified in order to solve a given decision problem or play a given name.
    Date: 2005–11–19
  3. By: José Manuel Madeira Belbute (Department of Economics, University of Évora Author-Name Paulo Brito; Technical University of Lisbon – Instituto Superior de Economia e Gestão)
    Abstract: This note extends the standard theory of intertemporal consumer preferences with regard environmental goods and services. It proposes an intertemporal dependent preferences framework that generates a “persistence effect” consistent with consumer’s environmental friendly behaviours. Given the present civilizational and cultural pattern of preferences, consumers need to endure a learning-by-consuming process to full enjoy (and use) them, in order to commit himself with “green-economic behaviors" The contribution to the existing literature is two fold. First we consider the presence of habit-formation with regard the consumption of environmental goods and services in a two goods framework. Secondly, we establish a consistent preference structure that displays a bounded adjacent complementarity in the consumption of environmental goods and services and present the correspondent properties that need to bee fulfilled by the utility function. These extensions will allow new advances in environmental economics, especially in the complete characterization of the demand for environmental goods and services and for the sustainable growth debate.
    Keywords: Consumer behavior, intertemporal dependent preferences, environmental economics.
    JEL: C61 E20 D11 D81 D91 Q01
    Date: 2006
  4. By: Ingmar, SCHUMACHER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Benteng, ZOU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: In this article we extend the recent literature on overlapping generations and pollution by allowing each generation’s utility to depend on past levels of pollution. To conform with the literature on habit in consumption we call this extension habit in pollution. Habit in pollution can visualize itself as either a concern for the flow of pollution only, or for the stock, or anything in between. We show that habit in pollution has not only significant consequences for the level of pollution and capital, but also for the evolution of utility over time. We observe that habit in pollution can lead to violations of two standard criteria of sustainability, which suggests that habit in pollution can be another source of intergenerational inequity.
    JEL: Q20 I31
    Date: 2006–12–31
  5. By: Horna, J. Daniela; Smale, Melinda; von Oppen, Matthias
    Abstract: "A typical private good is defined by its excludability and rivalry characteristics. Information embodied in a technology might not generate rivalry among its users. By contrast, excludability is certainly a characteristic of this kind of information and its delivery can generate incentives for private participation. This study examines farmers' preferences for seed of new rice varieties and their willingness to pay for seed-related information in villages of Nigeria and Benin. Conjoint analysis is used to estimate the structure of farmers' preferences for rice seed given a set of alternatives. Farmers are considered to be consumers of seed as a production input, preferring one variety over another based on the utility they obtain from its attributes, which depends on their own social and economic characteristics, including whether or not they sell rice. Contingent methods are used to elicit preferences and willingness to pay (WTP) for rice seed. The marginal values of attributes, with and without information about the seed, are estimated with an ordered probit regression. WTP for information is derived from the analysis of WTP for rice seed. The results have implications for the best way to finance research and extension services in the areas of intervention, particularly for new rice varieties. " Authors' Abstract
    Keywords: Willingnes to pay (WTP) ,seed-related information ,conjoint analysis ,rice attributes ,farmers' preferences ,technology ,
    Date: 2005
  6. By: Berden Caroline; Peters Hans (METEOR)
    Abstract: The effect of replacing an agent in a two-person two-state finance economy by a more risk averse agent is studied. It is established under which conditions the other agent benefitsor looses in equilibrium from dealing with a more risk averse agent. If one agent becomes more risk averse, then the equilibrium allocation moves towards that agent''s certainty line. Whether or not that is beneficial for the other agent, depends on the location of the endowment point.
    Keywords: microeconomics ;
    Date: 2006
  7. By: Holger Bonin; Amelie Constant; Konstantinos Tatsiramos; Klaus F. Zimmermann
  8. By: Thorsten Koeppl (Department of Economics, Queen's University)
    Abstract: Societies provide institutions that are costly to set up, but able to enforce long-run relationships. We study the optimal decision problem of using self-governance for risk sharing or governance through enforcement provided by these institutions. Third-party enforcement is modelled as a costly technology that consumes resources, but permits the punishment of agents who deviate from ex-ante specified allocations. We show that it is optimal to employ the technology whenever commitment problems prevent first-best risk sharing, but never optimal to provide incentives exclusively via this technology. Commitment problems then persist and the optimal incentive structure changes dynamically over time with third-party enforcement monotonically increasing in the relative inequality between agents.
    Keywords: Limited Commitment, Risk Sharing, Third-party Enforcement
    JEL: C73 D60 D91 K49
    Date: 2005–01
  9. By: Kotaro Suzumura; Naoki Yoshihara
    Abstract: An extended social choice framework is proposed for the analysis of initial conferment of individual rights. This framework captures the intuitive conception of decision-making procedure as a carrier of intrinsic value along with the instrumental usefulness thereof in realizing valuable culmination outcomes. The model of social decision-making consists of two stages. In the first stage, the society decides on the game-form rights to be promulgated. In the second stage, the promulgated game form rights, coupled with the revealed profile of individual preference orderings over the set of culmination outcomes, determine a fully-fledged game, the play of which determines a culmination outcome at the Nash equilibrium. A set of sufficient conditions for the existence of a social choice procedure, which can choose a game form in the first stage that is not only liberal, but also uniformly applicable to every revealed profile of individual preference orderings over the set of culmination outcomes, is identified.
    Keywords: Extended alternative; Extended constitution function; Uniformly rational choice; Liberal game form; Non-consequentialist evaluation of rightssystem
    JEL: D63 D71
    Date: 2006–03
  10. By: Einat Neuman (Academic College of Tel Aviv-Yaffo); Shoshana Neuman (Bar-Ilan University, CEPR and IZA Bonn)
    Abstract: The standard assumption in economic theory is that preferences are stable. In particular, they are not changed as a result of experience with the good/service/event. Behavioral scientists have challenged this assumption and claimed (providing evidence) that preferences are constantly changing when experience is accumulated. This paper tests the effect of experience on preferences for attributes of health-care events. We are using two very different samples and a methodology that facilitates the estimation of marginal utilities of various attributes of a composite non-traded health-care service. Discrete Choice Experimental design is employed for the analysis of samples of (1) women who gave birth, and (2) women who were diagnosed with breast cancer. For each group we had information on experience. In the case of women who gave birth, the sample was decomposed into 3 sub-samples: pregnant women with their first child (no experience); women after one delivery (single experience); and mothers after more than one delivery (multiple experience). Preferences of the 3 sub-groups have then been compared. The breast cancer patients reported the number of chemotherapy/radiation treatments they have already received, thus enabling the construction of an experience variable and testing for the effect of experience on preferences. The basic finding is that preferences for health-care attributes are significantly changed as a result of experience with the health event. However, the amount of experience is irrelevant.
    Keywords: preferences, experience, Discrete Choice Experiment, health-care, delivery, breast cancer
    JEL: D12 I19
    Date: 2006–03

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