|
on Utility Models and Prospect Theory |
| By: | David Cass (Department of Economics, University of Pennsylvania) |
| Abstract: | A major virtue of von Neumann-Morgenstern utilities, for example, in the theory of general financial equilibrium (GFE), is that they ensure intertemporal consistency: consumption-portfolio plans (for the future) are in fact executed (in the future) — assuming that there is perfect foresight about relevant endogenous variables. This note proposes an alternative to expected utility, one which also delivers consistency between plan and execution — and more. In particular, it turns out that one special case is in fact simply discounted (subjective) expected utility. Moreover, this alternative formulation affords an extremely natural setting for introducing extrinsic uncertainty. The key idea behind my approach is to divorce the concept of filtration (of the state space) from any considerations involving probability (on the state space), and then concentrate attention on nested utilities of consumption looking forward from any date-event: utility today depends only on consumption today and prospective utility of consumption tomorrow, utility tomorrow depends only on consumption tomorrow and prospective utility of consumption the day after tomorrow, and so on. |
| Keywords: | Utility theory, Expected utility, Intertemporal consistency, Extrinsic uncertainty, Cass-Shell Immunity Theorem |
| JEL: | D61 D81 D91 |
| Date: | 2007–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-001&r=upt |
| By: | Huy CHHAING (Graduate School of Economics, Osaka University) |
| Abstract: | One of the major concerns in supply chain management is the coordination among various members of a supply chain comprising suppliers, manufacturers, distributors, wholesalers and retailers. We consider a newsvendor model in a two level supply chain with one supplier and one retailer. In this model, the retailer must order the item from the supplier prior to the selling season. Due to the short selling season and long replenishment lead time, the retailer is unable to reorder the item by using actual sales data generated from the early part of the season. The purpose of this paper is to discuss the eect of the attitudes toward risk of the members on the coordination in a supply chain. Using the risk averse utility functions, we show that, the risk averse retailer's optimal order quantity is less than or equal to that of a risk neutral one, when the goodwill penalty cost is ignored. We also explore the relationship between the retailer's order quantity and the risk aversion function in a special case. |
| Keywords: | Supply chain management, Newsvendor model, Risk aversion. |
| JEL: | C61 C63 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0803&r=upt |
| By: | Dalton, Patricio (Department of Economics, University of Warwick); Ghosal, Sayantan (Department of Economics, University of Warwick) |
| Abstract: | We study decision problems where (a) preference parameters are defined to include psychological/moral considerations and (b) there is a feedback effect from chosen actions to preference parameters. In a standard decision problem the chosen action is required to be optimal when the feedback effect from actions to preference parameters is fully taken into account. In a behavioural decision problem the chosen action is optimal taking preference parameters as given although chosen actions and preference parameters are required to be mutually consistent. Our framework unifes seemingly disconnected papers in the literature. We characterize the conditions under which behavioural and standard decisions problems are indistinguishable : in smooth settings, the two decision problems are generically distinguishable. We show that in general, revealed preferences cannot be used for making welfare judgements and we characterize the conditions under which they can inform welfare analysis. We provide an existence result for the case of incomplete preferences. We suggest novel implications for policy and welfare analysis. |
| Keywords: | Decisions ; psychology ; indistinguishability ; revealed preferences ; welfare ; existence ; aspirations |
| JEL: | D01 D62 C61 I30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:834&r=upt |
| By: | Mette Christensen (Institute for Fiscal Studies and University of Manchester) |
| Abstract: | <p><p>In recent years it has become apparent that we must take unobservable heterogeneity into account when conducting empirical consumer demand analysis. This paper is concerned with integrability (that is, whether demand is consistent with utility maximization) of the conditional mean demand (that is, the estimated demand) when allowing for unobservable heterogeneity. </p> </p><p> </p><p><p>Integrability is important because it is necessary in order for the demand system estimates to be used for welfare analysis. Conditions for conditional mean demand to be integrable in the presence of unobservable heterogeneity are developed in the literature. There is, however, little empirical evidence suggesting whether these conditions for integrability are likely to be met in the data or not. In this paper we exploit the fact that the integrability conditions have testable implications for panel data and use a unique long panel data set to test them. Because of the sizeable longitudinal length of the panel, we are able to identify a very flexible specification of unobservable heterogeneity: We model individual demands as an Almost Ideal Demand system and allow for unobservable heterogeneity by allowing all intercept and slope parameters of the demand system to be individual-specific. We test the conditions for integrability of the conditional mean demand of this demand system. We do not reject them. This means that the conditional mean demand generated by a population of consumers with different preferences described by different Almost Ideal Demand systems is consistent with utility maximization. Given that integrability is not rejected, we conclude by an comparing the estimated demand system elasticties and welfare effects from a model with no heterogeneity (which is the model that would usually be estimated from cross sectional data) to those obtained from our heterogeneous model. </p> </p><p> </p><p><p>We find that the homogeneous model severely overestimates income elasticities for luxury goods and that the welfare effects from the heterogeneous model exhibit a large amount of heterogeneity, but deviate with only a few percentage points from the homogeneous model at the mean.</p></p> |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:07/14&r=upt |