nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2009‒08‒22
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Attitude toward information and learning under multiple priors By Robert Kast; André Lapied; Pascal Toquebeuf
  2. Generalized measures of wage differentials By Van Kerm, Philippe
  3. How to understand our willingness-to-pay to fight climate change? A choice experiment approach By Clément De Chaisemartin; Thuriane Mahé
  4. Goal-Based Investing with Cumulative Prospect Theory and Satisficing Behavior By Enrico G. De Giorgi
  5. Bimodal Bidding in Experimental All-Pay Auctions By Christiane Ernst; Christian Thöni
  6. Beyond Procedural Equity and Reciprocity By Nadine Chlaß; Werner Güth; Topi Miettinen
  7. Identification of structural dynamic discrete choice models By Le-Yu Chen
  8. Forward Induction Works! An Experimental Study to Test the Robustness and the Power By Quazi Shahriar

  1. By: Robert Kast (LAMETA - Laboratoire Montpellierain d'économie théorique et appliquée - CNRS : UMR5474 - INRA : UR1135 - CIHEAM - Université Montpellier I - Montpellier SupAgro); André Lapied (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Pascal Toquebeuf (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: This paper studies learning under multiple priors by characterizing the decision maker's attitude toward information. She is incredulous if she integrates new information with respect to only those measures that minimizes the likelihood of the new information and credulous if she uses the maximum likelihood procedure to update her priors. Both updating rules expose her to dynamic inconsistency. We explore different ways to resolve this problem. One way consists to assume that the decision maker's attitude toward information is not relevant to characterize conditional preferences. In this case, we show that a necessary and sufficient condition, introduced by [Epstein L. and Schneider M., 2003. Recursive multiple priors. Journal of Economic Theory 113, 1-31], is the rectangularity of the set of priors. Another way is to extend optimism or pessimism to a dynamic set-up. A pessimistic (max-min expected utility) decision maker will be credulous when learning bad news but incredulous when learning good news.Conversely, an optimistic (max-max expected utility) decision maker will be credulous when learning good news but incredulous when learning bad news. It allows max-min (or max-max) expected utility preferences to be dynamically consistent but it violates consequentialism because conditioning works with respect to counterfactual outcomes. The implications of our findings when the set of priors is the core of a non-additive measure are explored.
    Keywords: Multiple priors ; Learning ; Dynamic consistency ; Consequentialism ; Attitude toward information
    Date: 2009–08–07
  2. By: Van Kerm, Philippe (CEPS/INSTEAD)
    Abstract: This paper considers new 'distributionally sensitive' summary measures of wage differentials, not solely determined by "the average wage of the average person" but by differences across complete wage distributions. Considerations of risk or inequality aversion in the assessment of wage differentials are explicitly included, transplanting expected utility concepts familiar to income distribution analysts. In an application to the gender pay gap in Luxembourg the disadvantage of women persists with the new generalized measures of wage differentials. This suggests that lower average wages for women are not compensated by less dispersed distributions. The paper also illustrates original estimation of wage distributions in the presence of covariates and under endogenous labour market participation.
    Keywords: wage differentials; discrimination ; expected utility ; Singh-Maddala ; Luxembourg
    JEL: D63 J31 J70
    Date: 2009–08
  3. By: Clément De Chaisemartin (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Thuriane Mahé (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: We explore the willingness-to-pay (WTP) to fight climate change in a choice experiment. Since tree planting prevents climate change, subjects are offered to choose between receiving a high amount of money or receiving a lower amount of money plus participating to tree planting action. This allows us to get an individual interval of the WTP to prevent climate change. We also set the experiment to control for framing effects: we measure whether subjects WTP is higher not to prevent a tree planting action (negative framing) than to contribute to it (positive framing). Finally, we measure subjects' individual characteristics like altruism and risk aversion with a questionnaire, to understand the determinants of WTP. The results show that the WTP to prevent climate change is high: subjects are ready to give up half their gains to participate to a tree planting action. Women tend to have a higher WTP. We also find that both altruistic and self-interested motives can explain WTP. Surprisingly, their degree of knowledge of climate change related issues do not influence subjects WTP. Finally, when the choice is negatively phrased, WTP increases: subjects are ready to pay more not to make the number of trees planted decrease than to increase it. This suggests that negative eco-labelling might have a greater impact on consumer preferences than positive labels.
    Keywords: willingness-to-pay, preferences elicitation, carbon-offset schemes, framing effect, climate change.
    Date: 2009–03–25
  4. By: Enrico G. De Giorgi
    Abstract: This paper presents a time-continuous goal-based portfolio selection model with cumulative prospect theory preferences and satisficing behavior, where investors optimally split their wealth among several investment goals at different horizons. The paper extends the model of Berkelaar, Kouwenberg and Post (2004) to account for multiple-goals. We show that when the discounted values of all target wealths is not too high relative to the initial wealth (i.e., goals are not too ambitious), investors mainly invest to reach short-term investment goals and adopt safe investment strategies for this purpose. However, when goals are very ambitious, they put a high proportion of their wealth in long-term goals and adopt aggressive investment strategies with high leverage to reach short-term goals and the overall investment strategy also displays high leverage. High incentives to reach ambitious shortterm goals (high target returns) and the consequent excessive leverage have been identified as causes for the global financial crisis erupted in 2008.
    Keywords: behavioral finance, portfolio selection, mental accounting, narrow framing, cumulative prospect theory, satisficing, loss aversion, goal-based approach
    JEL: D10 G11
    Date: 2009–08
  5. By: Christiane Ernst; Christian Thöni
    Abstract: We report results from experimental first-price, sealed-bid, all-pay auctions for a good with a common and known value. We observe bidding strategies in groups of two and three bidders and under two extreme information conditions. As predicted by the Nash equilibrium, subjects use mixed strategies. In contrast to the prediction under standard assumptions bids are drawn from a bimodal distribution: very high and very low bids are much more frequent than intermediate bids. Standard risk preferences cannot account for our results. However, bidding behavior is consistent with the predictions of a model with reference dependent preferences as proposed by the prospect theory.
    Keywords: All-pay Auction; Prospect Theory, Experiment
    JEL: D44 D72 D80 C91
    Date: 2009–08
  6. By: Nadine Chlaß (Friedrich Schiller University Jena, Germany); Werner Güth (Max Planck Institute of Economics, Jena, Germany); Topi Miettinen (SITE Stockholm School of Economics, Sweden.)
    Abstract: Most research in economics models agents somehow motivated by outcomes. Here, we model agents motivated by procedures instead, where procedures are defined independently of an outcome. To that end, we design procedures which yield the same expected outcomes or carry the same information on other's intentions while they have different outcome-invariant properties. Agents are experimentally confirmed to exhibit preferences over these which link to psychological attributes of their moral judgment.
    Keywords: procedural preferences, experiment, procedural fairness
    JEL: C78 D63 Z13
    Date: 2009–08–12
  7. By: Le-Yu Chen (Institute for Fiscal Studies and Academia Sinica)
    Abstract: <p><p>This paper presents new identification results for the class of structural dynamic discrete choice models that are built upon the framework of the structural discrete Markov decision processes proposed by Rust (1994). We demonstrate how to semiparametrically identify the deep structural parameters of interest in the case where utility function of one choice in the model is parametric but the distribution of unobserved heterogeneities is nonparametric. The proposed identification method does not rely on the availability of terminal period data and hence can be applied to infinite horizon structural dynamic models. For identification we assume availability of a continuous observed state variable that satisfies certain exclusion restrictions. If such excluded variable is accessible, we show that the structural dynamic discrete choice model is semiparametrically identified using the control function approach.</p> </p><p><p>This is a substantial revision of "Semiparametric identification of structural dynamic optimal stopping time models", CWP06/07.</p></p>
    Date: 2009–05
  8. By: Quazi Shahriar (Department of Economics, San Diego State University)
    Abstract: Cooper et al. (1993) found support for forward induction but its true predictive power was less than the apparent level due to a confounding focal point; an outside-option asymmetry generated the focal point. We test for the robustness and the true and independent predictive power of forward induction by changing the asymmetry type and constructing a symmetric game (i.e. no focal point). Our results, for the first time, confirm that forward induction functions (1) in games with different types of asymmetry, and (2) as an independent selection criterion in the absence of a confounding factor. We also find that controlling for social preferences provides some additional support to forward induction.
    Date: 2009–08

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