nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒08‒16
four papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Data dispersion near the boundaries: can it partially explain the problems of decision and utility theories? By Alexander Harin
  2. Estimating Bayesian Decision Problems with Heterogeneous Priors By Hansen, Stephen; McMahon, Michael
  3. Demand for weather hedges in India: An empirical exploration of theoretical predictions: By Hill, Ruth Vargas; Robles, Miguel; Ceballos, Francisco
  4. Nonparametric analysis of random utility models: testing By Yuichi Kitamura; Jörg Stoye

  1. By: Alexander Harin (MUH - Modern University for the Humanities - Modern University for the Humanities)
    Abstract: An existence theorem for a bias of the mean in the presence of data dispersion is proved. The ultimate aims are to use this theorem to explain the well-known problems of utility and decision theories, such as risk aversion, the underweighting of high and the overweighting of low probabilities, the Allais paradox, etc. The results may be used to estimate preferences, choices, decisions, (ir)rational behavior at data uncertainty, noises and experimental errors in experiments interpretation, probability theory, statistics, management, finance, investment, insurance, etc.
    Keywords: data; behavior; rational; risk; noise; decision; utility;
    Date: 2013–08–11
  2. By: Hansen, Stephen (Universitat Pompeu Fabra); McMahon, Michael (University of Warwick)
    Abstract: In many areas of economics there is a growing interest in how expertise and preferences drive individual and group decision making under uncertainty.Increasingly, we wish to estimate such models to quantify which of these drive decision making. In this paper we propose a newc hannel through which we can empirically identify expertise and preference parameters by using variation indecisions over heterogeneous priors.Relative to existing estimation approaches,our"Prior Based Identification" extends the possible environments which can be estimated, and also substantially improves the accuracy and precision of estimates in those environments which can be estimated using existing methods.
    Keywords: Bayesian decision making;expertise;preferences;estimation.
    Date: 2013
  3. By: Hill, Ruth Vargas; Robles, Miguel; Ceballos, Francisco
    Abstract: This paper analyzes the demand for rainfall-based weather hedges among farmers in rural India. We explore the predictions of a standard expected utility theory framework on the nature of demand for such products, in particular testing whether demand behaves as predicted with respect to price, the basis of the hedge, and risk aversion using data from a randomized control trial in which price and basis risk was varied for a series of hedging products offered to farmers. We find that demand behaves as predicted, with demand falling with price and basis risk, and appearing hump-shaped in risk aversion. Second, we analyze understanding of and demand for hedging products over time, examining the impact of increased investments in training on hedging products as well as evidence for learning by doing among farmers. We find evidence that suggests that learning by doing is more effective at increasing both understanding and demand.
    Keywords: index insurance, Economic theory, expected utility, weather index insurance, Risk, randomized experiment,
    Date: 2013
  4. By: Yuichi Kitamura (Institute for Fiscal Studies and Yale University); Jörg Stoye (Institute for Fiscal Studies and New York University)
    Abstract: This paper develops and implements a nonparametric test of Random Utility Models (RUM) using only nonsatiation and the Strong Axiom of Revealed Preference (SARP) as restrictions on individual level behaviour, allowing for fully unrestricted unobserved heterogeneity. The main application is the test of the null hypothesis that a sample of cross-sectional demand distributions was generated by a population of rational consumers. Thus, the paper provides a finite sample counterpart to the classic theoretical analysis of McFadden and Richter (1991). To do so, it overcomes challenges in computation and in asymptotic theory and provides an empirical application to the U.K. Household Expenditure Survey. An econometric result of independent interest is a test for inequality constraints when they are represented in terms of the rays of a cone rather than its faces.
    Keywords: stochastic rationality
    JEL: C14
    Date: 2013–08

This nep-upt issue is ©2013 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.