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on Utility Models and Prospect Theory |
| By: | Martin Dumav (Center for Mathematical Economics, Bielefeld University); Maxwell B. Stinchcombe (Department of Economics, University of Texas, Austin) |
| Abstract: | A choice problem is risky (respectively ambiguous) if the decision maker is choosing between probability distributions (respectively sets of probability distributions) over utility relevant consequences. We provide an axiomatic foundation for and a representation of continuous linear preferences over sets of probabilities on consequences. The representation theory delivers: first and second order dominance for ambiguous problems; a utility interval based dominance relation that distinguishes between sources of uncertainty; a complete theory of updating convex sets of priors; a Bayesian theory of the value of ambiguous information structures; complete separations of attitudes toward risk and ambiguity; and new classes of preferences that allow decreasing relative ambiguity aversion and thereby rationalize recent challenges to many of the extant multiple prior models of ambiguity aversion. We also characterize a property of sets of priors, descriptive completeness, that resolves several open problems and allows multiple prior models to model as large a class of problems as the continuous linear preferences presented here. |
| Keywords: | Ambiguity, decision theory, multiple priors, descriptive completeness, continuous linear functionals on spaces of sets, constant and decreasing relative ambiguity aversion, zonoids |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:480&r=upt |
| By: | Arthur E. Attema (iBMG/iMTA, Erasmus University, Rotterdam, Netherlands); Werner B.F. Brouwer (iBMG/iMTA, Erasmus University, Rotterdam, Netherlands); Olivier l'Haridon (CREM CNRS UMR 6211, University of Rennes 1, France) |
| Abstract: | It is well-known that expected utility (EU) has empirical deficiencies. Prospect theory (PT) has developed as an alternative with more descriptive validity. However, PT’s full function had not yet been quantified in the health domain. This paper is therefore the first to simultaneously measure utility of life duration, probability weighting, and loss aversion in the health domain. We observe loss aversion and risk aversion for gains and losses, which for gains can be explained by probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of probability 1/2 and concave utility. This contrasts with the common finding of convex utility for monetary losses. However, PT was proposed to explain choices among lotteries involving small outcomes. Life years are arguably not ‘small’ and need not generate convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility. These results are a first step in fitting non-EU models for health-related decisions. |
| Keywords: | prospect theory, life duration, QALY |
| JEL: | D90 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201321&r=upt |
| By: | Paola Manzini (University of St. Andrews); Marco Mariotti (University of St. Andrews) |
| Abstract: | We model a boundedly rational agent who suffers from limited attention. The agent considers each feasible alternative with a given (unobservable) probability,the attention parameter, and then chooses the alternative that maximises a preference relation within the set of considered alternatives. We show that this random choice rule is the only one for which the impact of removing an alternative on the choice probability of any other alternative is asymmetric and menu independent. Both the preference relation and the attention parameters are identified uniquely by stochastic choice data. |
| Keywords: | Discrete choice, Random utility, Logit model, Luce model, Consideration sets, bounded rationality, revealed preferences |
| JEL: | D0 |
| Date: | 2013–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1303&r=upt |
| By: | Rose-Anne Dana; Frank Riedel |
| Abstract: | We study a dynamic and infinite{dimensional model with incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk{adjusted prior and subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agents' multiple prior sets. A specific model with neither risk nor uncertainty at the aggregate level is considered. Risk is always fully insured. For small levels of ambiguity, there exists an equilibrium with inertia where agents also insure fully against Knightian uncertainty. When the level of ambiguity exceeds a critical threshold, full insurance no longer prevails and there exist equilibria with inertia where agents do not insure against uncertainty at all. We also show that equilibria with inertia are indeterminate. |
| Keywords: | Knightian Uncertainty, Ambiguity, Incomplete Preferences, General Equilibrium Theory, No Trade, Dynamic General Equilibrium |
| JEL: | D51 D81 D91 |
| Date: | 2013–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:16&r=upt |
| By: | Sam COSAERT; Thomas DEMUYNCK |
| Abstract: | The theory of revealed preferences offers an elegant way to test the neoclassical model of utility maximization subject to a linear budget constraint. In many settings, however, the set of available consumption bundles does not take the form of a linear budget set. In this paper, we adjust the theory of revealed preferences to handle situations where the set of feasible bundles is finite. Such situations occur frequently in many real life and experimental settings. We derive the revealed preference conditions for consistency with utility maximization in this finite choice-set setting. Interestingly, we find that it is necessary to make a distinction between the cases where the underlying utility function is weakly monotone, strongly monotone and/or concave. Next, we provide conditions on the structure of the finite choice sets for which the usual revealed preference condition (i.e. GARP) is still valid. We illustrate the relevance of our results by means of an application based on two experimental data sets that contain choice behavior from children. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces13.08&r=upt |
| By: | Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Maria Romaniello (Seconda Università di Napoli) |
| Abstract: | In this paper we consider a model of games of incomplete information under ambiguity in which players are endowed with variational preferences. We provide an existence result for the corresponding mixed equilibrium notion. Then we study the limit behavior of equilibria under perturbations on the indices of ambiguity aversion. |
| Keywords: | Incomplete information games, multiple priors, variational preferences, equilibria |
| Date: | 2013–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:336&r=upt |
| By: | Thomas Michielsen (Tilburg University) |
| Abstract: | I analyze optimal natural resource use in an intergenerational model with the risk of a catastrophe. Each generation maximizes a weighted sum of discounted utility (positive) and the probability that a catastrophe will occur at any point in the future (negative). The model generates time- inconsistency as generations disagree on the relative weights on utility and catastrophe prevention. As a consequence, future generations emit too much from the current generation’s perspective and a dynamic game ensues. I consider a sequence of models. When the environmental problem is related to a scarce exhaustible resource, early generations have an in-incentive to reduce emissions in Markov equilibrium in order to enhance the ecosystem’s resilience to future emissions. When the pollutant is expected to become obsolete in the near future, early generations may however in- crease their emissions if this reduces future emissions. When polluting inputs are abundant and expected to remain essential, the catastrophe becomes a self-fulfilling prophecy and the degree of concern for catastrophe prevention has limited or even no effect on equilibrium behaviour. |
| Keywords: | Catastrophic Events, Decision Theory, Uncertainty, Time Consistency |
| JEL: | C73 D83 Q54 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.55&r=upt |
| By: | Georgios Gerasimou |
| Abstract: | This paper proposes a model of choice that does not assume completeness of the decision maker\'s preferences. The model explains in a natural way, and within a unied framework of choice when preference-incomparable options are present, four behavioural phenomena: the attraction effect, choice deferral, the strengthening of the attraction effect when deferral is permissible, and status quo bias. The key element in the proposed decision rule is that an individual chooses an alternative from a menu if it is worse than no other alternative in that menu and is also better than at least one. Utility-maximising behaviour is included as a special case when preferences are complete. The relevance of the partial dominance idea underlying the proposed choice procedure is illustrated with an intuitive generalisation of weakly dominated strategies and their iterated deletion in games with vector payoffs. |
| Keywords: | Choice with incomplete preferences; attraction effect; status quo bias; games with vector payoffs; iterative dominance |
| JEL: | D01 |
| Date: | 2013–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1302&r=upt |
| By: | Anastasios Koukoumelis (Max Planck Institute of Economics, Strategic Interaction Group, Jena); M. Vittoria Levati (Max Planck Institute of Economics, Strategic Interaction Group, Jena, and DSE, University of Verona); Matteo Ploner (Department of Economics, University of Trento) |
| Abstract: | Previous studies have shown that other-regarding concerns are weakened under risky situations. Daily experience also suggests that people care more about an identifiable than about an unidentifiable third person. We report on an experiment designed to explore whether rendering the other identifiable-via a speechless video and the revelation of personal information-affects the relationship between other-regarding concerns and risk preferences when there is risk to one's own and/or the other's payoff. We find that the acquisition of information about the other has no effect on behavior. Regardless of the treatment, most of the participants are other-regarding with respect to expected payoff but self-oriented with respect to risk allocation. |
| Keywords: | Risk attitudes, Other-regarding concerns, Identifiability |
| JEL: | C90 D63 D81 |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2013-028&r=upt |
| By: | Linda Sass (Center for Mathematical Economics, Bielefeld University) |
| Abstract: | Riedel and Sass (2013) propose a framework for normal form games where players can use imprecise probabilistic devices. We extend this strategic use of objective ambiguity to extensive form games. We show that with rectangularity of Ellsberg strategies we have dynamic consistency in the sense of Kuhn (1953): rectangular Ellsberg strategies are equivalent to Ellsberg behavior strategies. We provide an example for our result and define Ellsberg equilibrium in such extensive form Ellsberg games. |
| Keywords: | Knightian Uncertainty in Games, Objective Ambiguity, Strategic Ambiguity, Extensive Form Ellsberg Games, Kuhn's Theorem, Rectangularity |
| JEL: | C72 C73 D81 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:478&r=upt |
| By: | Batstone, Chris; Moores, Jonathan; Baines, James; Harper, Sharleen |
| Abstract: | Much contemporary socio-economic environmental policy evaluation is undertaken using decision utility based approaches such as choice modelling and contingent valuation. In this paper we describe an investigation into the use of the contrasting “experienced utility” concept to assess changes in environmental quality. The research context is the development of a spatial decision support system that discriminates between catchment development options in terms of their effects on the receiving water bodies of urban storm water. We report the outcomes of the application of an expert elicitation process from the risk assessment literature to the trial of a visual analogue method designed to elicit experienced utility scores from consultation workshops to assess the effects of multi-attribute changes to ecosystem services in urban estuaries. |
| Keywords: | Ecosystem services, experienced utility, expert elicitation, Community/Rural/Urban Development, Environmental Economics and Policy, International Development, |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare13:152137&r=upt |