nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒08‒05
fourteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The Role of Probability Interval and Emotional Parameters By Robert M. Feinberg; Mahmud Yesuf
  2. Risk Aversion and Emotions By Nguyen, Y.; Noussair, C.N.
  3. Ordinal, nonlinear context dependence By O'Callaghan, Patrick
  4. Leadership, Information, and Risk Attitude: A Game Theoretic Approach By John T. Kulas; Mana Komai; Saint Cloud State University; Philip J. Grossman
  5. Analytical Guidance for Fitting Parsimonious Household-Portfolio Models to Data By Sylwia Hubar; Christos Koulovatianos; Jian Li
  6. Justice under uncertainty By Riedl A.M.; Cettolin E.
  7. Whither Dairy Policy? Evaluating Expected Government Outlays and Distributional Impacts of Alternative 2013 Farm Bill Dairy Title Proposals By Newton, John; Thraen, Cameron S.; Bozic, Marin
  8. Neural Activity Reveals Preferences Without Choices By Alec Smith; B. Douglas Bernheim; Colin Camerer; Antonio Rangel
  9. A link based network route choice model with unrestricted choice set By Fosgerau, Mogens; Frejinger, Emma; Karlstrom, Anders
  10. Do Hypothetical Choices and Non-Choice Ratings Reveal Preferences? By B. Douglas Bernheim; Daniel Bjorkegren; Jeffrey Naecker; Antonio Rangel
  11. Trip-timing decisions with traffic incidents By Fosgerau, Mogens; Lindsey, Robin
  12. Some Mathematical Properties of the Dynamically Inconsistent Bellman Equation: A Note on the Two-sided Altruism Dynamics By Aoki, Takaaki
  13. Cupid's Invisible Hand: Social Surplus and Identification in Matching Models By Bernard Salanié; Alfred Galichon
  14. Fitting Complex Mixed Logit Models with Particular Focus on Labor Supply Estimation By Max Löffler

  1. By: Robert M. Feinberg; Mahmud Yesuf
    Abstract: We study risk and ambiguity aversion among experimental subjects, focusing on understanding the role of the degree of ambiguity (as measured by the probability interval) and selected emotional parameters on attitudes towards ambiguity. In contrast to the general findings in the literature that people usually tend to take gambles with known probability over equivalent gambles with ambiguous probability, we find that student subjects are ambiguity neutral when faced with a relatively narrow probability interval but ambiguity averse in relatively wider intervals. We also find that less trusting and more pessimistic individuals tend to avoid ambiguity, while a measure of subject happiness has no impact on ambiguity aversion. JEL classification:
    Date: 2013–07
  2. By: Nguyen, Y.; Noussair, C.N. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We consider the relationship between emotions and decision-making under risk. Specifically, we examine the emotional correlates of risk-averse decisions. In our experiment, individuals' facial expressions are monitored with facereading software, as they are presented with risky lotteries. We then correlate these facial expressions with subsequent decisions in risky choice tasks. We find that the valence of one’s emotional state is negatively correlated, and the strength of a number of emotions: fear, happiness, anger, and surprise, is positively correlated, with risk-averse decisions.
    Keywords: Risk aversion;emotions;facereading;fear.
    JEL: C9
    Date: 2013
  3. By: O'Callaghan, Patrick
    Abstract: Prospect theory [KT79] and its more recent formalizations [KR06, KR07] prescribe "nonlinear" reference-dependence. The same may be said of other forms of context-dependence such as status quo bias [MO05]. Even in settings where there is a strong case for linear context-dependence such as Gilboa and Schmeidler's theory of case-based decisions, nonlinearity is typical in the absence of "diversity of preference". Furthermore, the hope of providing an axiomatic foundation for neuroscientific models of decision making, where context is interpreted as a physical state or "connectome" suggest a general, ordinal axiomatization of nonlinear context-dependence is called for. As with traditional, "context-free" models of ordinal utility (eg. Debreu [Deb54]), the issue of continuity is central: precise, yet simple and intuitive, conditions on the set of contexts are needed if preferences have a representation that is continuous across contexts. The continuity condition I employ is the obvious choice and is a generalisation of [GS03a]. There are interesting connections with literature on jointly continuous utility [Lev83, CCM09]. Finally, a promising feature of the present approach is it that may be used to axiomatise payoffs associated with discontinuous games (such as Bertrand oligopoly).
    Keywords: Risk and Uncertainty,
    Date: 2013–05–18
  4. By: John T. Kulas; Mana Komai; Saint Cloud State University; Philip J. Grossman
    Abstract: This paper experimentally investigates how risk attitudes mitigate leadership effectiveness in a collective setting with projects that exhibit both free riding and coordination problems. We take two novel approaches: 1) the introduction of economic game theory to psychological studies of leadership, and 2) the application of the leadership ontology of Drath et al. (2008) as a crossdisciplinary integrative framework. Leadership here is focused on the presence or absence of direction, alignment, and commitment as well as antecedent beliefs and practices that are held within a collective (for us, our experimental participants). Our leadership context is stripped down to very minimal conditions: three group members, an investment decision, and the introduction of information regarding group members' attitudes toward risk. We find that the mere mention of risk attitude (whether risky or risk averse) undermines leadership effectiveness in mitigating free riding for our 420 experimental participants. Our study’s primary implications lie in the application of game theory methodology to the psychological study of leadership, the introduction of relevant individual difference constructs to economic studies of leadership, and the advocation of the Drath et al. (2008) framework as a helpful integrative mechanism for interdisciplinary leadership research.
    Keywords: game theory; risk attitude; interdisciplinary research; group dynamics
    Date: 2013–07
  5. By: Sylwia Hubar (University of Exeter Business School, United Kingdom.); Christos Koulovatianos (CREA, Université de Luxembourg); Jian Li (Goethe University Frankfurt, House of Finance, Germany)
    Abstract: Saving rates and household investment in stocks and business equity are all increasing in income and wealth. Introducing subsistence consumption to a common-across-households Epstein-Zin-Weil utility function is up to a quantitative explanation, in the context of stan- dardized parsimonious household-portfolio models with risky income. Closed forms in a sim- pli?fied version of the model, with insurable labor-income risk and no liquidity constraints, reveal that if, (i) risky-asset returns are weakly correlated and, (ii) household resources are expected to grow over time, then poorer households can afford exiting subsistence concerns slowly by saving less and by taking less risk, while holding balanced portfolios.
    Keywords: Epstein-Zin-Weil recursive preferences, subsistence consumption, household-portfolio shares, business equity, wealth inequality
    JEL: G11 D91 D81 D14 D11 E21
    Date: 2013
  6. By: Riedl A.M.; Cettolin E. (GSBE)
    Abstract: An important element for the public support of policies is their perceived justice. At the same time most policy choices have uncertain outcomes. We report the results of a first experiment investigating just allocations of resources when some recipients are exposed to uncertainty. Although, under certainty almost all uninvolved participants distribute resources equally, they exhibit remarkable heterogeneity in just allocations under uncertainty. Moreover, uninvolved participants allocate on average less to recipients exposed to higher degrees of uncertainty and allocations are correlated with their own risk preferences. The observed allocations are consistent with four different views of justice under uncertainty.
    Keywords: Design of Experiments: Laboratory, Individual; Equity, Justice, Inequality, and Other Normative Criteria and Measurement;
    JEL: C91 D63
    Date: 2013
  7. By: Newton, John; Thraen, Cameron S.; Bozic, Marin
    Abstract: In this analysis we compare the total expected government outlays and distribution of benefits under newly proposed dairy margin insurance programs to those under existing counter-cyclical payment programs. We combine simulation and structural modeling techniques to forecast milk price and dairy income-over-feed-cost margins. Using the price forecasts we employ Monte-Carlo experiments to evaluate the total expected government outlays for a sample of 5000 representative farms given a constant relative risk aversion utility framework. We find that expected outlays favor large farm operations and are an order of magnitude higher than those under existing programs. Under the current policy framework (MILC), farms with less than 100 cows (76% of farms) account for 42% of net payments and farms over 1000 cows (2% of farms) account for 6% of net payments. Under the new policy regime farms with fewer than 100 cows will get 17-21% of net program benefits, and farms over 1000 cows will get 36-43% of benefits.
    Keywords: dairy, margin insurance, farm bill, supply-management, dairy security act, dairy freedom act, Gini coefficient, farm payments, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Farm Management, Livestock Production/Industries, Risk and Uncertainty,
    Date: 2013
  8. By: Alec Smith; B. Douglas Bernheim; Colin Camerer; Antonio Rangel
    Abstract: We investigate the feasibility of inferring the choices people would make (if given the opportunity) based on their neural responses to the pertinent prospects when they are not engaged in actual decision making. The ability to make such inferences is of potential value when choice data are unavailable, or limited in ways that render standard methods of estimating choice mappings problematic. We formulate prediction models relating choices to “non-choice” neural responses and use them to predict out-of-sample choices for new items and for new groups of individuals. The predictions are sufficiently accurate to establish the feasibility of our approach.
    JEL: C91 D12
    Date: 2013–07
  9. By: Fosgerau, Mogens; Frejinger, Emma; Karlstrom, Anders
    Abstract: This paper considers the path choice problem, formulating and discussing an econometric random utility model for the choice of path in a network with no restriction on the choice set. Starting from a dynamic specification of link choices we show that it is equivalent to a static model of the multinomial logit form but with infinitely many alternatives. The model can be consistently estimated and used for prediction in a computationally efficient way. Similarly to the path size logit model, we propose an attribute called link size that corrects utilities of overlapping paths but that is link additive. The model is applied to data recording path choices in a network with more than 3,000 nodes and 7,000 links.
    Keywords: discrete choice; recursive logit; networks; route choice; infinite choice set
    JEL: C25 C5
    Date: 2013–07
  10. By: B. Douglas Bernheim; Daniel Bjorkegren; Jeffrey Naecker; Antonio Rangel
    Abstract: We develop a method for determining likely responses to a change in some economic condition (e.g., a policy) for settings in which either similar changes have not been observed, or it is challenging to identify observable exogenous causes of past changes. The method involves estimating statistical relationships across decision problems between choice frequencies and variables measuring non-choice reactions, and using those relationships along with additional non-choice data to predict choice frequencies under the envisioned conditions. In an experimental setting, we demonstrate that this method yields accurate measures of behavioral responses, while more standard methods are either inapplicable or highly inaccurate.
    JEL: C91 D12 H31 Q51
    Date: 2013–07
  11. By: Fosgerau, Mogens; Lindsey, Robin
    Abstract: This paper analyzes traffic bottleneck congestion when drivers randomly cause incidents that temporarily block the bottleneck. Drivers have general scheduling preferences for time spent at home and at work. They independently choose morning departure times from home to maximize expected utility without knowing whether an incident has occurred. The resulting departure time pattern may be compressed or dispersed according to whether or not the bottleneck is fully utilized throughout the departure period on days without incidents. For both the user equilibrium (UE) and the social optimum (SO) the departure pattern changes from compressed to dispersed when the probability of an incident becomes sufficiently high. The SO can be decentralized with a time-varying toll, but drivers are likely to be strictly worse off than in the UE unless they benefit from the toll revenues in some way. A numerical example is presented for illustration. Finally, the model is extended to encompass minor incidents in which the bottleneck retains some capacity during an incident.
    Keywords: Departure-time decisions, bottleneck model, traffic incidents; congestion; scheduling utility; morning commute; evening commute
    JEL: C61 D62 R41
    Date: 2013
  12. By: Aoki, Takaaki
    Abstract: This article describes some dynamic aspects on dynastic utility incorporating two-sided altruism with an OLG setting. We analyzed the special case where the weights of two-sided altruism are dynamically inconsistent. The Bellman equation for two-sided altruism proves to be reduced to one-sided dynamic problem, but the effective discount factor is different only in the current generation. We show that a contraction mapping result of value function cannot be achieved in general, and that there can locally exist an infinite number of self-consistent policy functions with distinct steady states (indeterminacy of self-consistent policy functions).
    Keywords: Bellman equation, Two-sided altruism, Dynamic inconsistency, Self-consistent policy functions, Indeterminacy, Overlapping generations model.
    JEL: C61 D91 O41
    Date: 2013–03–10
  13. By: Bernard Salanié; Alfred Galichon (Département d'économie)
    Abstract: We investigate a model of one-to-one matching with transferable utility when some of the characteristics of the players are unobservable to the analyst. We allow for a wide class of distributions of unobserved heterogeneity, subject only to a separability assumption that generalizes Choo and Siow (2006). We first show that the stable matching maximizes a social gain function that trades off the average surplus due to the observable characteristics and a generalized entropy term that reflects the impact of matching on unobserved characteristics. We use this result to derive simple closed-form formulæ that identify the joint surplus in every possible match and the equilibrium utilities of all participants, given any known distribution of unobserved heterogeneity. If transfers are observed, then the pre-transfer utilities of both partners are also identified. We also present a very fast algorithm that computes the optimal matching for any specification of the joint surplus. We conclude by discussing some empirical approaches suggested by these results.
    Date: 2013
  14. By: Max Löffler (IZA; University of Cologne)
    Abstract: When estimating discrete choice models, the mixed logit approach is commonly superior to simple conditional logit setups. Mixed logit models not only allow the researcher to implement difficult random components but also overcome the restrictive IIA assumption. Despite these theoretical advantages, the estimation of mixed logit models becomes cumbersome when the model's complexity increases. Applied works therefore often rely on rather simple empirical specifications as this reduces the computational burden. I introduce the user-written command lslogit which fits complex mixed logit models using maximum simulated likelihood methods. As lslogit is a d2-ML-evaluator written in Mata, the estimation is rather efficient compared to other routines. It allows the researcher to specify complicated structures of unobserved heterogeneity and to choose from a set of frequently used functional forms for the direct utility function---e.g., including Box-Cox transformations which are difficult to estimate in the context of logit models. The particular focus of lslogit is on the estimation of labor supply models in the discrete choice context and therefore it facilitates several computational exhausting but standard tasks in this research area. However, the command can be used in many other applications of mixed logit models as well.
    Date: 2013–08–01

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