nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒08‒16
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Justifiable choice By Heller, Yuval
  2. Attitudes to Ambiguity in One-Shot Normal-Form Games: An Experimental Study By Asen Ivanov
  3. Public Sector Employees: Risk Averse and Altruistic? By Margaretha Buurman; Robert Dur; Seth Van den Bossche
  4. Nominalist Heuristics and Economic Theory By Robin Pope; Reinhard Selten; Sebastian Kube

  1. By: Heller, Yuval
    Abstract: In many situations a decision maker has incomplete psychological preferences, and the weak axiom of revealed preference (WARP) is often violated. In this paper we relax WARP, and replace it with convex axiom of revealed non-inferiority (CARNI). An alternative x is revealed inferior to y if x is never chosen when y is in the convex hull of the choice set. CARNI requires that an alternative is chosen if it is not inferior to all other alternatives in the convex hull of the choice set. We apply CARNI in two models and axiomatize non-binary choice correspondences. In the first model we impose the standard axioms of expected utility model, except that WARP is replaced by CARNI. We prove that it has a multiple-utility representation: There is a unique convex set of vN-M utilities, such that an alternative is chosen if and only if it is best with respect to one of the utilities in this set. In the second model we impose the axioms of the subjective expected utility, relax WARP in a similar way, and get multiple-prior representation: There is a unique convex set of priors over the state of nature, such that an alternative is chosen if and only if it is best with respect to one of these priors. Both representations are closely-related to psychological insights of justifiable choice: The decision maker has several ways to evaluate acts, each with a different justification. Observable payoff-irrelevant information during the choice triggers her to use a specific “anchoring” justification for the evaluation of the alternatives.
    Keywords: uncertainty; multiple priors; multiple utilities; incomplete preferences; anchoring; framing; non-binary choice.
    JEL: D81
    Date: 2009–06–10
  2. By: Asen Ivanov (Department of Economics, VCU School of Business)
    Abstract: Based on an experiment in the lab, we classify behavior in one-shot normal-form games along three important dimensions. The first dimension, which is of main interest, is about whether subjects are ambiguity-loving, ambiguity-neutral, or ambiguity-averse. The second dimension is about whether subjects are risk-loving, risk-neutral, or risk-averse. The third dimension is about whether subjects are naive or strategic. Our main result is that, in our main treatment, 32/46/22 percent of subjects are classified as ambiguity-loving/ambiguity-neutral/ ambiguity-averse.
    Keywords: games, experiments, beliefs, ambiguity, risk
    JEL: C72 C92 C51 D81 D84
    Date: 2009–08
  3. By: Margaretha Buurman (Erasmus University Rotterdam); Robert Dur (Erasmus University Rotterdam); Seth Van den Bossche (TNO Work and Employment)
    Abstract: We assess whether public sector employees have a stronger inclination to serve others and are more risk averse than employees in the private sector. A unique feature of our study is that we use revealed rather than stated preferences data. Respondents of a large-scale survey were offered a substantial reward and could choose between a widely redeemable gift certificate, a lottery ticket, or making a donation to a charity. Our analysis shows that public sector employees are significantly less likely to choose the risky option (lottery) and, at the start of their career, significantly more likely to choose the pro-social option (charity). However, when tenure increases, this difference in pro-social inclinations disappears and, later on, even reverses. Our results further suggest that quite a few public sector employees do not contribute to charity because they feel that they already contribute enough to society at work for too little pay.
    Keywords: public service motivation; risk aversion; revealed preferences data
    JEL: H1 J45 M52
    Date: 2009–07–31
  4. By: Robin Pope; Reinhard Selten; Sebastian Kube
    Abstract: This paper introduces a new theoretic entity, a nominalist heuristic, defined as a focus on prominent numbers, indices or ratios. Abstractions used in the evaluation stage of decision making typically involve nominalist heuristics that are incompatible with expected utility theory which excludes the evaluation stage, and are also incompatible with prospect theory which assumes that, while the evaluation procedure can involve systematic mistakes, the overall decision situation is nevertheless sufficiently simple: 1) for economists and psychologists to identify what is a mistake, and 2) to be compatible with maximisation. But in the typical complex situation giving rise to nominalist heuristics neither 1) nor 2) hold, and therefore what is required is a fundamentally different class of models that allow for the progressive anticipated changes in knowledge ahead faced under risk and uncertainty, namely models under the umbrella of SKAT, the Stages of Knowledge Ahead Theory. A sequel paper. Pope et al 2009b, shows field and laboratory evidence of heuristics in the form of prominent numbers entering exchange rate determination.
    Keywords: nominalism, money illusion, heuristic, unpredictability, experiment, SKAT the Stages of Knowledge Ahead Theory, prominent numbers, prominent indices, prominent ratios, equality, historical benchmarks, complexity, decision costs, evaluation
    JEL: D80 D81 F31 F33
    Date: 2009–08

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