nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2014‒08‒25
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Behavioral Dimensions of Contests By Roman M. Sheremeta
  2. Realization Utility with Reference-Dependent Preferences By Jonathan E. Ingersoll Jr.; Lawrence J. Jin
  3. Collective choices under ambiguity By M. Vittoria Levati; Stefan Napel; Ivan Soraperra
  4. “The Gustibus Errari (pot)Est”: Utility Misprediction, Preferences for Well-being and Life Satisfaction By Leonardo Becchetti; Pierluigi Conzo
  5. De Gustibus Non Est Disputandum: An Experimental Investigation By Dasgupta, Utteeyo; Gangadharan, Lata; Maitra, Pushkar; Mani, Subha
  6. Diversification and Endogenous Financial Networks By Jean-Cyprien H\'eam; Erwan Koch
  7. Nash bargaining and renegotiation with social preferences: case of the roundwood log supply contracts By Ahmed Barkaoui; Arnaud Dragicevic
  8. Social Risk: the Role of Warmth and Competence By Jeffrey V. Butler; Joshua B. Miller

  1. By: Roman M. Sheremeta (Weatherhead School of Management, Case Western Reserve University and The Economic Science Institute, Chapman University)
    Abstract: The standard theoretical description of rent-seeking contests is that of rational individuals or groups engaging in socially inefficient behavior by exerting costly effort. Experimental studies find that the actual efforts of participants are significantly higher than predicted in the models based on rational behavior and that over-dissipation of rents (or overbidding or over-expenditure of resources) can occur. Although over-dissipation cannot be explained by the standard rational-behavior theory, it can be explained by incorporating behavioral dimensions into the standard model, such as (1) the utility of winning, (2) relative payoff maximization, (3) bounded rationality, and (4) judgmental biases. These explanations are not exhaustive but provide a coherent picture of important behavioral dimensions to be considered when studying rent-seeking behavior in theory and in practice.
    Keywords: rent-seeking, contests, experiments, overbidding, over-dissipation
    Date: 2014
  2. By: Jonathan E. Ingersoll Jr.; Lawrence J. Jin
    Abstract: We develop a tractable model of realization utility that studies the role of reference-dependent S-shaped preferences in a dynamic investment setting with reinvestment. Our model generates both voluntarily realized gains and losses. It makes specific predictions about the volume of gains and losses, the holding periods, and the sizes of both realized and paper gains and losses that can be calibrated to a variety of statistics, including the Odean measure of the disposition effect. Our model also predicts several anomalies including, among others, the flattening of the capital market line and a negative price for idiosyncratic risk.
    Date: 2014–08
  3. By: M. Vittoria Levati (University of Verona and Max Planck Institute of Economics, Jena); Stefan Napel (University of Bayreuth); Ivan Soraperra (University of Verona)
    Abstract: We investigate experimentally whether collective choice matters for individual attitudes to ambiguity. We consider a two-urn Ellsberg experiment: one urn offers a 45% chance of winning a fixed monetary prize, the other an ambiguous chance. Participants choose either individually or in groups of three. Group decision rules vary. In one treatment the collective choice is taken by majority; in another it is dictated by two group members; in the third it is dictated by a single group member. We observe high proportions of ambiguity averse choices in both individual and collective decision making. Although a majority of participants display consistent ambiguity attitudes across their decisions, collective choice tends to foster ambiguity aversion, especially if the decision rule assigns asymmetric responsibilities to group members. Previous participation in laboratory experiments may miti- gate this.
    Keywords: Ambiguity aversion, majority voting, dictatorship
    JEL: C91 C92 D71 D81
    Date: 2014–08–19
  4. By: Leonardo Becchetti (DEDI and CEIS, Università di Roma "Tor Vergata"); Pierluigi Conzo (Dept. of Economics and Statistics, University of Turin)
    Abstract: The life satisfaction literature generally focuses on how life events affect subjective well-being. Through a contingent valuation survey we test whether well-being preferences have significant impact on life satisfaction. A sample of respondents is asked to simulate a policymaker decision consisting in allocating scarce financial resources among 11 well-being domains. Consistently with the utility misprediction hypothesis, we find that the willingness to invest more in the economic well-being domain is negatively correlated with life satisfaction. Our findings are shown to be robust when we account for unobservables related to economic fragility and non-random sample selection. Reverse causality and omitted variable bias are controlled for with instrumental variables and a sensitivity analysis on departures from exogeneity assumptions. Subsample estimates document that the less educated are more affected by the problem.
    Keywords: life satisfaction, well-being preferences, utility misprediction, subjective well-being
    JEL: A13 D64 H50 I31
    Date: 2014–08–08
  5. By: Dasgupta, Utteeyo; Gangadharan, Lata; Maitra, Pushkar; Mani, Subha
    Abstract: The goal of this paper is to examine stability in preferences using the Stigler- Becker state-dependent framework. Using a randomized intervention that changes the opportunity sets of individuals we construct a unique panel data from an artefactual field experiment and evaluate whether the change in the state space influences our selected indicators of preferences: risk, competitiveness, and confidence. We find that there is considerable heterogeneity of preferences across individuals at a point in time; risk and competitive preferences inter-temporally are consistent with state-dependent preferences, while measures of confidence seem to depend on past experiences.
    Keywords: Preference stability, State Contingent Preferences, Artefactual Field Experiment
    JEL: C9 D01 D03
    Date: 2014–08–18
  6. By: Jean-Cyprien H\'eam; Erwan Koch
    Abstract: We propose to test the assumption that interconnections across financial institutions can be explained by a diversification motive. This idea stems from the empirical evidence of the existence of long-term exposures that cannot be explained by a liquidity motive (maturity or currency mismatch). We model endogenous interconnections of heterogenous financial institutions facing regulatory constraints using a maximization of their expected utility. Both theoretical and simulation-based results are compared to a stylized genuine financial network. The diversification motive appears to plausibly explain interconnections among key players. Using our model, the impact of regulation on interconnections between major banks -currently discussed at the Basel Committee on Banking Supervision- is analyzed.
    Date: 2014–08
  7. By: Ahmed Barkaoui (Laboratoire d'Economie Forestière, INRA - AgroParisTech); Arnaud Dragicevic (Laboratoire d'Economie Forestière, INRA - AgroParisTech; Chaire Forêts pour Demain, Agro ParisTech–Office National des Forêts)
    Abstract: We consider two economic agents, a timber and log supplier and a lumber manufacturer, endowed with the mean-variance utility preferences that negotiate according to the Nash bargaining game. We study both negotiation and renegotiation between a supplier that can be either public-oriented or profit-maximizing and a profit-maximizing manufacturer. We first prove that the Nash bargaining game has a unique equilibrium log supply contract, at which the negotiation takes only place on the prices. We then find that the expected profitmaximizing is achieved when the supplier’s public interest and the manufacturer’s bargaining power are strategic substitutes. The renegotiation reveals the presence of a memory effect over the quantities issued from bargaining. As well, it unveils strategic complementarity of changes in expected profits. The simulations we conduct provide an insight of the model outcomes.
    Keywords: Nash Bargaining, Renegotiation, Social Preferences, Supply Contracts, Forest-Based Sector
    JEL: C78 D21 D86 L33
    Date: 2014–07
  8. By: Jeffrey V. Butler; Joshua B. Miller
    Abstract: Previous research has documented a behavioral distinction between "social risk" and financial risk. For example, individuals tend to demand a premium on the objective probability of a favorable outcome when that outcome is determined by a human being instead of a randomizing device (Bohnet, Greig, Herrmann, and Zeckhauser 2008; Bohnet and Zeckhauser 2004). In this paper we ask whether social risk is always aversive, answering in the negative and identifying factors that can eliminate, or even change the sign of, the social risk premium. Motivated by the stereotype content model from the social psychology literature, which we argue has straightforward predictions for situations involving social risk (Fiske, Cuddy, and Glick 2007), we focus on two factors: "warmth", synonymous with intent, and "competence." We investigate these factors using a between-subjects experimental design that implements slight modifications of the binary trust game of Bohnet and Zeckhauser across treatments. Our results indicate that having risk generated by another human being does not, on its own, lead to a social risk premium. Instead, we find that a positive risk premium is demanded when a counter-party has interests con icting with one's own (low warmth) and, additionally, is competent. We find a negative social risk premium -i.e., social risk seeking- when the counter-party has contrary interests but lacks competence. JEL Classification: Z1, C91, D81 Keywords: Social Risk, Social Perception, Intention, Betrayal Aversion, Trust
    Date: 2014

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