
on Utility Models and Prospect Theory 
By:  David Dillenberger (University of Pennsylvania); Uzi Segal (Boston College) 
Abstract:  Machina (2009, 2012) lists a number of situations where standard models of ambiguity aversion are unable to capture plausible features of ambiguity attitudes. Most of these problems arise in choice over prospects involving three or more outcomes. We show that the recursive nonexpected utility model of Segal (1987) is rich enough to accommodate all these situations. 
Keywords:  tAmbiguity, Ellsberg paradox, Choquet expected utility, recursive nonexpected utility 
JEL:  D81 
Date:  2012–05–20 
URL:  http://d.repec.org/n?u=RePEc:boc:bocoec:800&r=upt 
By:  Pogany, Peter 
Abstract:  Since value and utility are the highest profile abstractions that underlie an epoch’s intellectual climate and ethical principles, their evolution reflects the transformation of socioeconomic conditions and institutions. The “Classical Phase” flourished during the first global system, laissezfaire/metal money/zero multilateralism (GS1); the second, “Subjective/Utilitarian” phase marked the long transition to the current epoch of “Modern Subjectivism/General Equilibrium,” tied to the second and extant global system, mixed economy/minimum reserve banking/weak multilateralism (GS2). History has witnessed the material deessentialization of value and substantialization of utility. But now the two concepts face a thorough transvaluation as the world’s combined demographic and economic expansion encounters ecological/physical limitations. An extended macrohistoric implosion may lead to a third form of global selforganization: twolevel economy/maximum bank reserve money/strong multilateralism (GS3). If history unfolds along the suggested path, not only economics, but also thinking about economics would change. It would be considered an evolving hermeneutic of the human condition expressed through globalsystemspecific texts. The implied critical alteration, with the recognition of the entropy law’s importance as its focal point, matches the prediction of Swiss thinker Jean Gebser (19051973) about the impending mutation of human consciousness into its integral/arational structure. Such extrapolations form the context in which the fourth historical phase of value and utility is hypothesized, leading to the material reessentialization of value and desubstantialization of utility. 
Keywords:  value; utility; new historical materialism; a new take on universal history 
JEL:  A12 Z10 N00 Q01 B00 
Date:  2012–05–15 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:39056&r=upt 
By:  T M Niguez; Ivan Paya; D Peel; J Perote 
Abstract:  Economic growth models under uncertainty and rational agents with CRRA utility have been shown to provide quite fragile explanations of consumers.choice as equlib rium comsumption paths (expected utility) are drastically dependant on distributional assumptions. We show that assuming a SNP distribution for random consumption provides stability to general equilibrium models as expected utility exists for any value of the marginal rate of substitution over time. 
Date:  2011 
URL:  http://d.repec.org/n?u=RePEc:lan:wpaper:2418&r=upt 
By:  Cosmin Ilut; Martin Schneider 
Abstract:  This paper considers business cycle models with agents who dislike both risk and ambiguity (Knightian uncertainty). Ambiguity aversion is described by recursive multiple priors preferences that capture agents' lack of confidence in probability assessments. While modeling changes in risk typically requires higherorder approximations, changes in ambiguity in our models work like changes in conditional means. Our models thus allow for uncertainty shocks but can still be solved and estimated using firstorder approximations. In our estimated mediumscale DSGE model, a loss of confidence about productivity works like `unrealized' bad news. Timevarying confidence emerges as a major source of business cycle fluctuations. 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:duk:dukeec:1206&r=upt 
By:  Hao Xing 
Abstract:  This paper studies stability of the exponential utility maximization when there are small variations on agent's utility. Two settings are studied. First, in a general semimartingale model where random endowments are present, there is a sequence of utilities defined on R converging to the exponential utility. Under a uniform condition on their marginal utilities, convergence of value functions, optimal terminal wealth and optimal investment strategies are obtained, their rate of convergence are determined. Stability of utilitybased pricing is also discussed. Second, there is a sequence of utilities defined on R_+ each of which is comparable to a power utility whose relative risk aversion converges to infinity. Their associated optimal strategies, after appropriate scaling, converge to the optimal strategy for the exponential hedging problem. This complements Theorem 3.2 in \textit{M. Nutz, Probab. Theory Relat. Fields, 152, 2012}, by allowing general utilities in the converging sequence. 
Date:  2012–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1205.6160&r=upt 
By:  Attila Ambrus; Kareen Rozen 
Abstract:  This paper studies a class of multiself decisionmaking models proposed in economics, psychology, and marketing. In this class, choices arise from the setdependent aggregation of a collection of utility functions, where the aggregation procedure satisfies some simple properties. We propose a method for characterizing the extent of irrationality in a choice behavior, and use this measure to provide a lower bound on the set of choice behaviors that can be rationalized with n utility functions. Under an additional assumption (scaleinvariance), we show that generically at most five "reasons" are needed for every "mistake." 
Keywords:  Multiself models, index of irrationality, IIA violations, rationalizability 
JEL:  D11 D13 D71 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:duk:dukeec:1211&r=upt 
By:  Antoni BoschDomènech; Joaquim Silvestre (Department of Economics, University of California Davis) 
Abstract:  Various experimental procedures aimed at measuring individual risk aversion involve a list of pairs of alternative prospects. We first study the widely used method by Holt and Laury (2002), for which we find that the removal of some items from the lists yields a systematic decrease in risk aversion. This bias is quite distinct from other confounds that have been previously observed in the use of the Holt and Laury method. It may be related to empirical phenomena and theoretical developments where better prospects increase risk aversion. Nevertheless, we have also found that the more recent elicitation method due to Abdellaoui et al. (2011), also based on lists, does not display any statistically significant bias when the corresponding items of the list are removed. Our results suggest that methods other than the popular Holt and Laury one may be preferable for the measurement of risk aversion. 
Keywords:  Risk aversion, risk attitudes, experiments, lists, elicitation method, Holt, Laury, Abdellaoui, Driouchi, l’Haridon, independence axiom 
JEL:  C 
Date:  2012–05–20 
URL:  http://d.repec.org/n?u=RePEc:cda:wpaper:1210&r=upt 
By:  Tomas Otahal (Department of Economics, Faculty of Business and Economics, Mendel University in Brno); Radim Valencik (University of Finance and Administration) 
Abstract:  How can errors in decisionmaking by rationally behaving individuals be explained? The concepts of bounded rationality proposed by H. Simon and of imperfect information in the complex reality by F. Hayek attack the overrestrictive assumption of perfectly informed individuals or organisms in neoclassical microeconomics. Since this assumption excludes erroneous decisionmaking, some results must be explained by questioning the rationality assumption. In this paper, we show that erroneous decisionmaking of individuals and organisms is not necessarily erroneous if we look at the contextual games which individuals and organisms play in the complex reality. This helps to explain errors in the decisionmaking of individuals or organisms, while maintaining the assumption of rational behavior. At the same time, we show that the errors observed in the contextual analysis of games in the decisionmaking of individuals or organisms can only be apparent. 
Keywords:  Bounded rationality, complex systems, contextual games, erroneous behavior, rational decisionmaking 
JEL:  D01 C73 
Date:  2012–06 
URL:  http://d.repec.org/n?u=RePEc:men:wpaper:21_2012&r=upt 
By:  Thierry Madiès (University of Fribourg, Bd de Pérolles 90, CH1700 Fribourg, Switzerland); MarieClaire Villeval (Université de Lyon, Lyon, F69007, France ; CNRS, GATE Lyon St Etienne,F69130 Ecully, France); Malgorzata Wasmer (University of Fribourg, Bd de Pérolles 90, CH1700 Fribourg, Switzerland) 
Abstract:  We study the attitudes of junior and senior employees towards strategic uncertainty and competition, by means of a market entry game inspired by Camerer and Lovallo (1999). Seniors exhibit higher entry rates compared to juniors, especially when earnings depend on relative performance. This difference persists after controlling for attitudes towards nonstrategic uncertainty and for beliefs on others’ competitiveness and ability. Social image matters, as evidenced by the fact that seniors enter more when they predict others enter more and when they are matched with a majority of juniors. This contradicts the stereotype of risk averse and less competitive older employees. 
Keywords:  Aging, risk, ambiguity, competitiveness, selfimage, confidence, experiment 
JEL:  C91 D83 J14 J24 M5 
Date:  2012 
URL:  http://d.repec.org/n?u=RePEc:gat:wpaper:1217&r=upt 
By:  Erhan Bayraktar; Virginia R. Young 
Abstract:  We determine the optimal amount of life insurance for a household of two wage earners. We consider the simple case of exponential utility, thereby removing wealth as a factor in buying life insurance, while retaining the relationship among life insurance, income, and the probability of dying and thus losing that income. For insurance purchased via a single premium or premium payable continuously, we explicitly determine the optimal death benefit. We show that if the premium is determined to target a specific probability of loss per policy, then the rates of consumption are identical under single premium or continuously payable premium. Thus, not only is equivalence of consumption achieved for the households under the two premium schemes, it is also obtained for the insurance company in the sense of equivalence of loss probabilities. 
Date:  2012–05 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1205.5958&r=upt 
By:  Harrison, Richard (Bank of England); Taylor, Tim (Bank of England) 
Abstract:  In this paper, we compare two approaches to modelling behaviour under nonrational expectations in a benchmark New Keynesian model. The ‘Euler equation’ approach modifies the equations derived under the assumption of rational expectations by replacing the rational expectations operator with an alternative assumption about expectations formation. The ‘longhorizon’ expectations approach solves the decision rules of households and firms conditional on their expectations for future events that are outside of their control, so that spending and pricesetting decisions depend on expectations extending into the distant future. Both approaches can be defended as descriptions of (distinct) forms of boundedly rational behaviour, but have different implications both for the form of the equations that govern the dynamics of the economy and the ease of deriving those equations. In this paper we construct two versions of a benchmark New Keynesian model in which nonrational expectations are modelled using the Euler equation and longhorizon approaches and show that both approaches have very similar implications for macroeconomic dynamics when departures from rational expectations are relatively small. But as expectations depart further from rationality, the two approaches can generate significantly different implications for the behaviour of key variables. 
Keywords:  Expectations; monetary transmission mechanism 
JEL:  D84 E17 
Date:  2012–05–18 
URL:  http://d.repec.org/n?u=RePEc:boe:boeewp:0448&r=upt 