nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2012‒11‒24
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Essential Data, Budget Sets and Rationalization. By Forges, Françoise; Iehlé, Vincent
  2. The missing link: Unifying risk taking and time discounting By Thomas Epper; Helga Fehr-Duda
  3. “At least I didn’t lose money” - Nominal Loss Aversion Shapes Evaluations of Housing Transactions By Thomas A. Stephens; Jean-Robert Tyran
  4. Identification of Demand Models of Multiple Purchases By Itai Sher; Kyoo il Kim
  5. An estimation of economic models with recursive preferences By Xiaohong Chen; Jack Favilukis; Sydney Ludvigson
  6. How Sensitive is Strategy Selection in Coordination Games? By Siegfried K. Berninghaus; Lora R. Todorova; Bodo Vogt
  7. Ranking Multidimensional Alternatives and Uncertain Prospects By Mongin, Philippe; Pivato, Marcus

  1. By: Forges, Françoise; Iehlé, Vincent
    Abstract: According to a minimalist version of Afriat’s theorem, a consumer behaves as a utility maximizer if and only if a feasibility matrix associated with his choices is cyclically consistent. An ”essential experiment” consists of observed consumption bundles (x1,xn) and a feasibility matrix α. Starting with a standard experiment, in which the economist has specific budget sets in mind, we show that the necessary and sufficient condition for the existence of a utility function rationalizing the experiment, namely, the cyclical consistency of the associated feasibility matrix, is equivalent to the existence, for any budget sets compatible with the deduced essential experiment, of a utility function rationalizing them (and typically depending on them). In other words, the conclusion of the standard rationalizability test, in which the economist takes budget sets for granted, does not depend on the full specification of the underlying budget sets but only on the essential data that these budget sets generate. Starting with an essential experiment (x1,...,xn;α), we show that the cyclical consistency of α, together with a further consistency condition involving both (x1,...,xn) and α, guarantees that the essential experiment is rationalizable almost robustly, in the sense that there exists a single utility function which rationalizes at once almost all budget sets which are compatible with (x1,...,xn;α). The conditions are also trivially necessary.
    Keywords: revealed preference; rational choice; cyclical consistency; budget sets; Afriat’s theorem;
    JEL: D11 C81
    Date: 2012
  2. By: Thomas Epper; Helga Fehr-Duda
    Abstract: Almost all important decisions in people’s lives entail risky and delayed consequences. Regardless of whether we make choices involving health, wealth, love or education, almost every choice involves costs and benefits that are uncertain and materialize over time. Because risk and delay often arise simultaneously, theories of decision making should be capable of explaining how behavior under risk and over time interacts. There is, in fact, a growing body of evidence indicating important interactions between behaviorally revealed risk tolerance and patience. Risk taking behavior is delay dependent, and time discounting is risk dependent. Here we show that the inherent uncertainty of future events conjointly with people’s proneness to weight probabilities nonlinearly generates a unifying framework for explaining time-dependent risk taking, risk-dependent time discounting, preferences for late resolution of uncertainty, and several other puzzling interaction effects between risk and time.
    Keywords: Risk taking, time discounting, probability weighting, decreasing impatience, increasing risk tolerance, preference for late resolution of uncertainty, preference for one-shot resolution of uncertainty
    JEL: D01 D81 D91
    Date: 2012–11
  3. By: Thomas A. Stephens (University of Vienna, Department of Economics); Jean-Robert Tyran (University of Copenhagen, Department of Economics)
    Abstract: Loss aversion is one of the most robust findings to have emerged from behavioral economics. Surprisingly little attention, however, has been devoted to nominal loss aversion, the interaction of loss aversion and money illusion. People tend to think of transactions in terms of their nominal (monetary) values. Real losses may therefore loom larger in people’s minds when they lose money than when real losses are hidden by purely nominal gains. Using a survey experiment with a large and heterogeneous sample, we show that evaluations of housing transactions are systematically biased by purely nominal gains versus losses.
    Keywords: loss aversion, money illusion, bounded rationality, cognitive reflection, cognitive ability, survey experiment
    JEL: A10 C91 D00
    Date: 2012–10–12
  4. By: Itai Sher (Department of Economics, University of Minnesota); Kyoo il Kim (Department of Economics, University of Minnesota)
    Abstract: We study the nonparametric identification of distributions of utility functions in a multiple purchase setting with a finite number of consumers. Each utility function takes as arguments subsets or, alternatively, quantities of the multiple goods. We exploit mathematical insights from auction theory to generically identify the distribution of utility functions. We use price variation and aggregate data on the sales of each product, but not on individual level purchases or the total sales of bundles of products.
    Keywords: Multiple Discrete Choice, Multiple Purchase, Nonparametric Identification, Distribution of Utility Functions, Individual Heterogeneity, Submodularity, Gross Substitutes
    JEL: C14 D11
    Date: 2012–11–09
  5. By: Xiaohong Chen (Institute for Fiscal Studies and Yale University); Jack Favilukis; Sydney Ludvigson
    Abstract: This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) recursive utility model, evaluates the models ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.
    JEL: G12 E21
    Date: 2012–10
  6. By: Siegfried K. Berninghaus (Institute for Economic Theory and Statistics, Karlsruhe Institute of Technology); Lora R. Todorova (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper presents the results of an experiment designed to study the effect produced on strategy choices when a subject reports risk preferences on a risk scale before engaging in a 2x2 coordination game. The main finding is that the act of stating one's own risk preferences significantly alters strategic behavior. In particular, subjects tend to choose the risk dominant strategy more often when they have previously stated their attitudes to risk. Within a best-response correspondence framework, this result can be explained by a change in either risk preferences or beliefs. We find that self-reporting risk preferences does not induce a change in subjects' beliefs. We argue that the behavioral arguments of strategy selection, such as focal points, framing and uncertain preferences can explain our results.
    Keywords: coordination game, questionnaire, risk scale, risk preferences, beliefs, focal points, framing, uncertain preferences
    JEL: D81 C91 C72
    Date: 2012–09
  7. By: Mongin, Philippe; Pivato, Marcus
    Abstract: We introduce a two-stage ranking of multidimensional alternatives, including uncertain prospects as particular case, when these objects can be given a suitable matrix form. The first stage defines a ranking of rows and a ranking of columns, and the second stage ranks matrices by applying natural monotonicity conditions to these auxiliary rankings. Owing to the Debreu-Gorman theory of additive separability, this framework is sufficient to generate very precise numerical representations. We apply them to three main types of multidimensional objects: streams of commodity baskets through time, monetary input-output matrices, and most extensively, uncertain prospects either in a social or an individual context of decision. Among other applications, the new approach delivers the strongest existing form of Harsanyi's (1955) Aggregation Theorem and casts light on the classic comparison between the ex ante and ex post Pareto principle. It also provides a novel derivation of subjective probability from preferences, in the style of Anscombe and Aumann (1963).
    Keywords: additively separable; multiattribute decisions; utilitarian; social welfare; social aggregation; ex ante Pareto; input-output matrix; subjective expected utility
    JEL: D81 D57 D60
    Date: 2012–11–07

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