nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2013‒09‒28
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Concave Expected Utility and Event Separability By Ehud Lehrer; Roee Tepper
  2. On the Elicitation of Time Preference under Conditions of Risk By Cheung, Stephen L.
  3. A review of the certainty effect and influence of information processing By Ramirez, Patrick A.; Levine, Daniel S.
  4. Inference of Bidders’ Risk Attitudes in Ascending Auctions with Endogenous Entry By Hanming Fang; Xun Tang
  5. Statistical utilitarianism By Pivato, Marcus
  6. Asymptotic analysis for Merton's problem with transaction costs in power utility case By Jin Hyuk Choi
  7. A New Perspective on Rational Expectations By Wei He; Nicholas C. Yannelis
  8. On Measuring Time Preferences By James Andreoni; Michael A. Kuhn; Charles Sprenger
  9. The relative income and relative deprivation hypotheses : a review of the empirical literature By Verme, Paolo
  10. On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods By Hai, Rong; Krueger, Dirk; Postlewaite, Andrew

  1. By: Ehud Lehrer; Roee Tepper
    Date: 2013–09–19
  2. By: Cheung, Stephen L.
    Abstract: Andreoni and Sprenger (2012) report evidence that distinct utility functions govern choices under certainty and risk. I investigate the robustness of this result to the experimental design. I find that the effect disappears completely when a multiple price list instrument is used instead of a convex time budget design. Alternatively, the effect is reduced by half when sooner and later payment risks are realized using a single lottery instead of two independent lotteries. The result is thus at least partially driven by intertemporal diversification, supporting an explanation in terms of concavity of the intertemporal, and not only atemporal, utility function.
    Keywords: multiple price list; convex time budget; risk and certainty; intertemporal choice
    Date: 2013–09
  3. By: Ramirez, Patrick A.; Levine, Daniel S.
    Abstract: This review considers two explanations for behavioral decision-making in reference to the certainty and framing effects. The findings from various paradigms such as a single questionnaire, gambles with repetition, and gambles guided by feedback are explained either by prospect theory or by expected utility theory. Finally this review attempts to account for the different findings and offers a possible explanation for the conflicting results by considering the role of experience which in turn can alter how information in processed as described by fuzzy trace theory which is a dual process theory of reasoning. --
    Keywords: expected utility theory,prospect theory,fuzzy trace theory,certainty effect,framing effect
    JEL: A10 Y80
    Date: 2013
  4. By: Hanming Fang; Xun Tang
    Abstract: Bidders' risk attitudes have key implications for choices of revenue-maximizing auction formats. In ascending auctions, bid distributions do not provide information about risk preference. We infer risk attitudes using distributions of transaction prices and participation decisions in ascending auctions with entry costs. Nonparametric tests are proposed for two distinct scenarios: first, the expected entry cost can be consistently estimated from data; second, the data does not report entry costs but contains exogenous variations of potential competition and auction characteristics. In the first scenario, we exploit the fact that the risk premium required for entry – the difference between ex ante expected profits from entry and the certainty equivalent – is strictly positive if and only if bidders are risk averse. Our test is based on identification of bidders' ex ante profits. In the second scenario, our test builds on the fact that risk attitudes affect how equilibrium entry probabilities vary with observed auction characteristics and potential competition. We also show identification of risk attitudes in a more general model of ascending auctions with selective entry, where bidders receive entry-stage signals that are correlated with private values.
    JEL: C12 C14 D44
    Date: 2013–09
  5. By: Pivato, Marcus
    Abstract: We show that, in a sufficiently large population satisfying certain statistical regularities, it is often possible to accurately estimate the utilitarian social welfare function, even if we only have very noisy data about individual utility functions and interpersonal utility comparisons. In particular, we show that it is often possible to identify an optimal or close-to-optimal utilitarian social choice using voting rules such as the Borda rule, approval voting, relative utilitarianism, or any Condorcet-consistent rule.
    Keywords: utilitarian; relative utilitarian; approval voting; Borda; scoring rule; Condorcet.
    JEL: D60 D70
    Date: 2013–09–06
  6. By: Jin Hyuk Choi
    Abstract: We revisit the optimal investment and consumption problem with proportional transaction costs. We prove that both the value function and the slopes of the lines demarcating the no-trading region are analytic functions of cube root of the transaction cost parameter. Also, we can explicitly calculate the coefficients of the fractional power series expansions of the value function and the no-trading region.
    Date: 2013–09
  7. By: Wei He; Nicholas C. Yannelis
    Date: 2013
  8. By: James Andreoni; Michael A. Kuhn; Charles Sprenger
    Abstract: Eliciting time preferences has become an important component of both laboratory and field experiments, yet there is no consensus as how to best measure discounting. We examine the predictive validity of two recent, simple, easily administered, and individually successful elicitation tools: Convex Time Budgets (CTB) and Double Multiple Price Lists (DMPL). Using similar methods, the CTB and DMPL are compared using within- and out-of-sample predictions. While each perform equally well within sample, the CTB significantly outperforms the DMPL on out-of-sample measures.
    JEL: D03 D14 G02
    Date: 2013–08
  9. By: Verme, Paolo
    Abstract: The paper provides a review of the empirical literature in economics that has attempted to test the relative income hypothesis as put forward by Duesemberry (1949) and the relative deprivation hypothesis as formalized by Runciman (1966). It is argued that these two hypotheses and the empirical models used to test them are essentially similar and make use of the same relative income concept. The review covers the main intellectual contributions that led to the formulation and tests of these hypotheses, the main formulations of the utility and econometric equations used in empirical studies, the main econometric issues that complicate tests of the hypotheses, and the empirical results found in the literature. The majority of studies uses absolute and relative income together as explanatory factors in utility models and finds absolute income to have a positive and significant effect on utility (happiness). The majority of studies also finds relative income to be a significant factor in explaining utility but the sign of this relation varies across studies. The source of this variation is complex to detect given that few results are directly comparable across studies because of differences in model specifications.
    Keywords: Inequality,Economic Theory&Research,Labor Policies,Poverty Impact Evaluation,Rural Poverty Reduction
    Date: 2013–09–01
  10. By: Hai, Rong; Krueger, Dirk; Postlewaite, Andrew
    Abstract: We propose a new classification of consumption goods into nondurable goods, durable goods and a new class which we call memorable goods. A good is memorable if a consumer can draw current utility from its past consumption experience through memory. We propose a novel consumption-savings model in which a consumer has a well-defined preference ordering over both nondurable goods and memorable goods. Memorable goods consumption differs from nondurable goods consumption in that current memorable goods consumption may also impact future utility through the accumulation process of the stock of memory. In our model, households optimally choose a lumpy profile of memorable goods consumption even in a frictionless world. Using Consumer Expenditure Survey data, we then document levels and volatilities of different groups of consumption goods expenditures, as well as their expenditure patterns, and show that the expenditure patterns on memorable goods indeed differ significantly from those on nondurable and durable goods. Finally, we empirically evaluate our model's predictions with respect to the welfare cost of consumption fluctuations and conduct an excess-sensitivity test of the consumption response to predictable income changes. We find that (i) the welfare cost of household-level consumption fluctuations may be overstated by 1.7 percentage points (11.9% points as opposed to 13.6% points of permanent consumption) if memorable goods are not appropriately accounted for; (ii) the finding of excess sensitivity of consumption documented in important papers of the literature might be entirely due to the presence of memorable goods.
    Keywords: Consumption Volatility; Memorable Goods; Welfare Cost
    JEL: D91 E21
    Date: 2013–09

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