nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒04‒13
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Discounting for Climate Change By Anthoff, David; Tol, Richard S. J.; Yohe, Gary W.
  2. How Exposure to Markets Can Favor Inequity Averse Preferences By Robertas Zubrickas
  3. Emotional Decision-Makers and Anomalous Attitudes towards Information By Francesca Barigozzi; Rosella Levaggi
  4. Gender Differences in Risk Behaviour: Does Nurture Matter? By Alison L. Booth; Patrick Nolen
  5. What can facilitate cooperation: Fairness, ineaulity aversion, punishment, norms or trust? By Urs Steiner Brandt
  6. Intergenerational Justice when Future Worlds Are Uncertain By Humberto Llavador; John E. Roemer; Joaquim Silvestre
  7. Other-Regarding Preferences and Leadership Styles By Kocher, Martin G.; Pogrebna, Ganna; Sutter, Matthias
  8. Regret once, think twice: the impact of experienced regret on risk choice By Daniela Raeva; Eric van Dijk

  1. By: Anthoff, David; Tol, Richard S. J.; Yohe, Gary W.
    Abstract: It is well-known that the discount rate is crucially important for estimating the social cost of carbon, a standard indicator for the seriousness of climate change and desirable level of climate policy. The Ramsey equation for the discount rate has three components: the pure rate of time preference, a measure of relative risk aversion, and the rate of growth of per capita consumption. Much of the attention on the appropriate discount rate for long-term environmental problems has focussed on the role played by the pure rate of time preference in this formulation. We show that the other two elements are numerically just as important in considerations of anthropogenic climate change. The elasticity of the marginal utility with respect to consumption is particularly important because it assumes three roles: consumption smoothing over time, risk aversion, and inequity aversion. Given the large uncertainties about climate change and widely asymmetric impacts, the assumed rates of risk and inequity version can be expected to play significant roles. The consumption growth rate plays four roles. It is one of the determinants of the discount rate, and one of the drivers of emissions and hence climate change. We find that the impacts of climate change grow slower than income, so that the effective discount rate is higher than the real discount rate. The differential growth rate between rich and poor countries determines the time evolution of the size of the equity weights. As there are a number of crucial but uncertain parameters, it is no surprise that one can obtain almost any estimate of the social cost of carbon. We even show that, for a low pure rate of time preference, the estimate of the social cost of carbon is indeed arbitrary – as one can exclude neither large positive nor large negative impacts in the very long run. However, if we probabilistically constrain the parameters to values that are implied by observed behaviour, we find that the social cost of carbon, corrected for uncertainty and inequity, is 61 US dollar per metric tonne of carbon.
    Keywords: Social cost of carbon, climate change, pure time preference, risk aversion, inequity aversion, income elasticity, time horizon, uncertainty
    JEL: Q54
    Date: 2009
  2. By: Robertas Zubrickas
    Date: 2009–04–04
  3. By: Francesca Barigozzi; Rosella Levaggi
    Abstract: We use a simple version of the Psychological Expected Utility Model (Caplin and Leahy, QJE, 2001) to analyze the optimal choice of information accuracy by an individual who is concerned with anticipatory feeling. The individual faces the following trade-off: on the one hand information may lead to emotional costs, on the other the higher the information accuracy, the higher the efficiency of decision-making. We completely and explicitly characterize how anticipatory utility depends on information accuracy, and study the optimal amount of information acquisition. We obtain simple and explicit conditions under which the individual prefers no-information or partial information gathering. We show that anomalous attitudes towards information can be more articulated than previously thought.
    Keywords: Psychological expected utility, Information gathering, Bayesian updating
    JEL: D81 D83
    Date: 2008–09
  4. By: Alison L. Booth; Patrick Nolen
    Abstract: Women and men may differ in their propensity to choose a risky outcome because of innate preferences or because their innate preferences are modified by pressure to conform to gender-stereotypes. Single-sex environments are likely to modify students’ risk-taking preferences in economically important ways. To test this, our controlled experiment gave subjects an opportunity to choose a risky outcome – a real-stakes gamble with a higher expected monetary value than the alternative outcome with a certain payoff- and in which the sensitivity of observed risk choices to environmental factors could be explored. The results show that girls from single-sex schools are as likely to choose the real-stakes gamble as much as boys from either coed or single sex schools, and more likely than coed girls. Moreover, gender differences in preferences for risk-taking are sensitive to the gender mix of the experimental group, with girls being more likely to choose risky outcomes when assigned to all-girl groups. This suggests that observed gender differences in behaviour under uncertainty found in previous studies might reflect social learning rather than inherent gender traits.
    Keywords: gender identity, controlled experiment, risk aversion, risk attitudes, single-sex schooling, coeducation
    JEL: C9 C91 C92 J16
    Date: 2009–02
  5. By: Urs Steiner Brandt (Department of Environmental and Business Economics, University of Southern Denmark)
    Abstract: Almost all economic and public choice models assume that all people are exclusively pursuing their own material self-interests and do not care about "social" goals per se. Several (laboratory) experiments address the question of the general validity of this assumption. A consistent conclusion emerges that a significant number of people deviate from the assumption of selfish rational behaviour; this conclusion is robust with respect to the design of the experiments. Therefore, public choice comes with a price: the conclusions are based on the stylized stereotype of economic man, an assumption that is not fully satisfied. The purpose of this paper is to show how to incorporate otherregarding preferences into an otherwise traditional utility approach without losing predicting power or compromising the rationality assumption. On the contrary, since other-regarding preferences are based on observed behaviour, the predicting power increases; this is demonstrated at the end of this paper, where it is shown how other-regarding preferences can explain the existence and persistence of a welfare state and why people might act sustainably.
    Date: 2008–11
  6. By: Humberto Llavador (Universitat Pompeu Fabra); John E. Roemer (Yale University); Joaquim Silvestre (University of California, Davis)
    Abstract: Suppose that there exists a positive (exogenous) probability that at each date of a possibly infinite future, the human species will disappear. We postulate an Ethical Observer (EO) who must solve an intertemporal welfare maximization problem under this kind of uncertainty, with preferences that satisfy the expected utility hypothesis. Various social welfare criteria are expressed as alternative von Neumann-Morgenstern utility functions for the EO: utilitarianism, Rawlsianism, and an extension of the latter that corrects for the size of population. Our analysis covers, first, a simple cake-eating economy, where the utilitarian and Rawlsian recommend the same intergenerational allocation. Second, we consider a productive economy with education and capital. There, however, the recommendations of the two Ethical Observers are in general (but not always) different. Surprisingly, when the utilitarian optimization program diverges, then it is optimal for the extended Rawlsian to ignore the uncertainty concerning the possible disappearance of the human species in the future. We conclude with some thoughts about what these results imply for the issue of intergenerational welfare maximization in the presence of global warming.
    Keywords: Discounted utilitarianism, Rawlsian, Sustainability, Maximin, Uncertainty, Expected utility, von Neumann-Morgenstern, Dynamic welfare maximization
    JEL: D63 D81 O40 Q54 Q56
    Date: 2009–04
  7. By: Kocher, Martin G. (University of Munich); Pogrebna, Ganna (Columbia University); Sutter, Matthias (University of Innsbruck)
    Abstract: We use a laboratory experiment to examine whether and to what extent other-regarding preferences of team leaders influence their leadership style in choice under risk. We find that leaders who prefer efficiency or report high levels of selfishness are more likely to exercise an autocratic leadership style by ignoring preferences of the other team members. Yet, inequity aversion has no significant impact on leadership styles. Elected leaders have a higher propensity than exogenously assigned leaders to use a democratic leadership style by reaching team consensus. Male leaders and leaders influenced by group membership tend to employ a democratic leadership style.
    Keywords: leadership style, other-regarding preferences, unobserved heterogeneity
    JEL: C91 C92 D70 D81
    Date: 2009–03
  8. By: Daniela Raeva; Eric van Dijk
    Abstract: We examine the behavioral consequences of experienced regret on subsequent choice. Previous experimental research findings suggest that the impact of experienced regret on repeating subsequent choice is mediated by the anticipation of experiencing regret again. We argue that this impact is due to a mechanism linked to the subjective probability to regret in the subsequent choice. We conducted an experiment to test whether this hypothesis can be generalized to the case where the subsequent choice is different than the preceding one. Participants were presented with a sequence of two different decision tasks: a choice between two risky gambles followed by a matching task. To induce experienced regret, we provided two different types of feedback on the gambles: non-regret and regret feedbacks. To gain insights to the role of anticipated regret in mediating the effect of experienced regret, we also introduced two different types of feedback on the matching task: partial and complete feedback. We found that prior experienced regret and complete feedback on the subsequent choice should be both present for a change in behavior in the subsequent different choice. To interpret our results, we provide analytical considerations based on our hypothesis of changed subjective probability to regret, consistent with the observed behavior.
    Keywords: risk choice, regret theory
    JEL: A12 C91
    Date: 2009

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