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on Utility Models and Prospect Theory |
| By: | Nicole El Karoui (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie (UPMC) - Paris VI - Université Paris VII - Paris Diderot); Caroline Hillairet (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS : UMR7641); Mohamed Mrad (LAGA - Laboratoire Analyse, Géométrie et Applications - CNRS : UMR7539 - Université Paris 13 - Université Paris VIII - Vincennes Saint-Denis - Institut Galilée - Université Sorbonne Paris Cité (USPC)) |
| Abstract: | The purpose of this paper relies on the study of long term yield curves modeling. Inspired by the economic litterature, it provides a financial interpretation of the Ramsey rule that links discount rate and marginal utility of aggregate optimal consumption. For such a long maturity modelization, the possibility of adjusting preferences to new economic information is crucial. Thus, after recalling some important properties on progressive utility, this paper first provides an extension of the notion of a consistent progressive utility to a consistent pair of progressive utilities of investment and consumption. An optimality condition is that the utility from the wealth satisfies a second order SPDE of HJB type involving the Fenchel-Legendre transform of the utility from consumption. This SPDE is solved in order to give a full characterization of this class of consistent progressive pair of utilities. An application of this results is to revisit the classical backward optimization problem in the light of progressive utility theory, emphasizing intertemporal-consistency issue. Then we study the dynamics of the marginal utility yield curve, and give example with backward and progressive power utilities. |
| Keywords: | forward utilities, consistent stochastic utilities, stochastic utility with consumtion, Ramsey Rule, Long term Yield curve, SDEs, Utility SPDE, stochastic flows |
| Date: | 2014–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00974815&r=upt |
| By: | Kasper Larsen; H. Mete Soner; Gordan Zitkovic |
| Abstract: | We establish the existence and characterization of a primal and a dual facelift - discontinuity of the value function at the terminal time - for utility-maximization in incomplete semimartingale-driven financial markets. Unlike in the lower- and upper-hedging problems, and somewhat unexpectedly, a facelift turns out to exist in utility-maximization despite strict convexity in the objective function. In addition to discussing our results in their natural, Markovian environment, we also use them to show that the dual optimizer cannot be found in the set of countably-additive (martingale) measures in a wide variety of situations. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1404.2227&r=upt |
| By: | Harin, Alexander |
| Abstract: | The concept of unforeseen events is considered as a part of a hypothesis of uncertain future. The applications of the consequences of the hypothesis in utility and prospect theories are reviewed. Partially unforeseen events and their role in forecasting are analyzed. Preliminary preparations are shown to be able, under specified conditions, to quicken the revisions of forecasts and to hedge or diversify financial risks after partially unforeseen events have occurred. General correcting formulae for forecasts are proposed. |
| Keywords: | forecast; uncertainty; risk; utility; decisions; Ellsberg paradox; |
| JEL: | C53 D8 D81 |
| Date: | 2014–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55283&r=upt |
| By: | Larry G. Epstein; Kyoungwon Seo |
| Abstract: | The paper outlines an exchangeable non-Bayesian model of preference generalizing the Savage/de Finetti classic model of subjective expected utility preference with an exchangeable prior. The treatment is informal, and the emphasis is on motivation and potential applications rather than on axiomatic foundations and technical details. The objective is to provide a widely accessible introduction to research that is reported in detail elsewhere. |
| Keywords: | Savage/de Finetti classic model, Ellsberg Paradox, |
| Date: | 2013–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2013s-35&r=upt |
| By: | Marc Fleurbaey (Woodrow Wilson School and Center for Human Values - Princeton University); Stéphane Zuber (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We provide a general method for extending fair social preferences defined for riskless economic environments to the context of risk and uncertainty. We apply the méthod to the problems of managing unemployment allowances (in the context of macroeconomic fluctuations) and catastrophic risks (in the context of climate change). It requires paying attention to individuals' risk attitudes and rationality properties of social preferences, revisiting basic ideas from Harsanyi's seminal work (Harsanyi, 1995). The social preferences that we obtain do not in general take the form of an expected utility criterion, but they always satisfy statewise dominance. We also show how non-expected utility individual preferences can be accommodated in the approach. |
| Keywords: | Social choice; uncertainty; economic environment; social risk |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00973480&r=upt |
| By: | Antoine Bommier (Chair for Integrative Risk Management and Economics - ETH Zurich); Bruno Lanz (Center for International Environmental Studies - Graduate Institute Geneva); Stéphane Zuber (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We study the role of alternative intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast the traditional "discounted utility" model, which assumes risk neutrality with respect to intertemporal utility, with a multiplicative choice model that displays risk aversion in that dimension. First, we show that both representations of preferences can rationalize the same "business as usual" economy for a given interest rate and no pollution externality. Second, once we introduce a collapse risk whose hazard rate is a function of the pollution stock, multiplicative preferences recommend a much more stringent policy response. An illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect, in terms of policy recommendations, as scaling up the schedule of the hazard rate by a factor of 100. |
| Keywords: | Environmental policy; climate change; catastrophic risks; risk aversion; discounting |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00973491&r=upt |
| By: | Ingmar Schumacher |
| Abstract: | The results in this paper show that the level of aggregation used in a social welfare func- tion matters significantly for policy analysis. Using climate change as an example, it is shown that, under the mild and widely-accepted assumptions of asymmetric climate change impacts and declining marginal utility, an aggregation dilemma may arise that dwarfs most other policy-relevant aspects in the climate change cost-benefit analysis. Estimates based on the RICE-99 model (Nordhaus and Boyer 2000) suggest that aggregation leads to around 26% higher total world emissions than those from a regional model. The backstop energy use would be zero in the model which aggregates consumption in utility, while it would be 1.3% of Gross World Product in a regionally-disaggregated version. In general we observe that richer countries will be required to undertake stronger efforts toward climate policy based on the aggregated utility social welfare function and compared to both the aggregated utility function with Negishi weights and the aggregated consumption function. We propose criteria that may aid in deciding on the level of aggregation one might wish to choose de- pending on both positive and normative criteria. Though the policy recommendations from fully aggregated models like the DICE model are always used as a benchmark for policy making, the results here suggest that this should be done with the reservations raised by the Aggregation Dilemma in mind. |
| Keywords: | Aggregation Dilemma; social welfare function; Integrated Assessment Models; climate policy. |
| JEL: | Q54 Q58 |
| Date: | 2014–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-224&r=upt |
| By: | André De Palma (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ENS Cachan - École Normale Supérieure de Cachan - École normale supérieure [ENS] - Cachan); Nathalie Picard (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Ignacio Inoa (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise) |
| Abstract: | There is still a long way to achieve the goal of providing a theoretical and empirical framework to model and apply economics of the family. Decision-making within the family has been neglected too long in transportation. Two special issues by Bhat and Pendyala, 2005 [17] and by Timmermans and Junyi Zhang, 2009 [81] provide the most notable exceptions. The objective of this paper is to set-up a flexible framework to discuss the development of integrated transportation models involving interacting and interdependent actors; updating previous reviews from the point of view of economics of the family . Transportation is very keen to have access to this type of models, since their applications are numerous. Let mention, for example, residential location choice, workplace choice, car ownership, choice of children's school, mode choice, departure time choice activity patterns and the like. The (non unitary) economics of the family models are totally different models, which do not merely extend existing discrete choice models. They introduce new concepts, which are specific to within family interactions: negotiation, altruism, or repeated interaction and Pareto optimality. This review is completed with the study of different types of accessibility measures including recent work on timegeography measures of accessibility. |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00969216&r=upt |