nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒02‒11
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Portfolio Optimization under Shortfall Risk Constraint By Oliver Janke; Qinghua Li
  2. Uncertain discount and hyperbolic preferences By Daniele Pennesi
  3. Aggregating Tastes, Beliefs, and Attitudes Under Uncertainty By Hill , Brian; Danan , Eric
  4. Ethnicity and Gender Differences in Risk, Ambiguity Attitude By Banerjee, Debosree
  5. Memory Utility By Itzhak Gilboa; Andrew Postlewaite; Larry Samuelson
  6. Positively-homogeneous Konus-Divisia indices and their applications to demand analysis and forecasting By Nikolay Klemashev; Alexander Shananin
  7. Fluctuations in uncertainty By Nicholas Bloom
  8. Networks of Rights in Conflict: A Talmudic Example By Barry O'Neill
  9. Monocentric city redux By Rappaport, Jordan
  10. An equilibrium model for spot and forward prices of commodities By Michail Anthropelos; Michael Kupper; Antonis Papapantoleon
  11. Cost-utility of cognitive behavioral therapy versus U.S. Food and Drug Administration recommended drugs and usual care in the treatment of patients with fibromyalgia: an economic evaluation alongside a 6-month randomized controlled trial By Juan V. Luciano; Francesco D’Amico; Marta Cerdà-Lafont; María T. Peñarrubia-María; Martin Knapp; Antonio I. Cuesta-Vargas; Antoni Serrano-Blanco; Javier García-Campayo

  1. By: Oliver Janke; Qinghua Li
    Abstract: This paper solves a utility maximization problem under utility-based shortfall risk constraint, by proposing an approach using Lagrange multiplier and convex duality. Under mild conditions on the asymptotic elasticity of the utility function and the loss function, we find an optimal wealth process for the constrained problem and characterize the bi-dual relation between the respective value functions of the constrained problem and its dual. This approach applies to both complete and incomplete markets. Moreover, we give a few examples of utility and loss functions in the Black-Scholes market where the solutions have explicit forms. Finally, the extension to more complicated cases is illustrated by solving the problem with a consumption process added.
    Date: 2015–01
  2. By: Daniele Pennesi (Université de Cergy-Pontoise, THEMA)
    Abstract: When the discount rate is uncertain, individuals whose preferences are consistent with discounted expected utility, exhibit diminishing impatience. This paper introduces and characterizes a variation of discounted expected utility in which the discount rate depends on the state of the nature that will occur. Quasi-hyperbolic discounting and the model of Dasgupta and Maskin (2005) are particular cases. The present bias disappears when the immediate payoff becomes uncertain. Commitment may be detrimental unless the discount rate is constant.
    Keywords: Diminishing Impatience, Uncertainty, Hyperbolic Discounting, Time Inconsistency
    JEL: D03 D90 D81
    Date: 2015
  3. By: Hill , Brian; Danan , Eric
    Abstract: The authors provide possibility results on the aggregation of beliefs and tastes for Monotone, Bernoullian and Archimedian preferences of Cerreia-Vioglio, Ghirardato, Maccheroni, Marinacci, and Siniscalchi (2011). The authors propose a new axiom, Unambiguous Pareto Dominance, which requires that if the unambiguous part of individuals’ preferences over a pair of acts agree, then society should follow them. They characterize the resulting social preferences and show that it is enough that individuals share a prior to allow non dictatorial aggregation. A further weakening of this axiom on common-taste acts, where cardinal preferences are identical, is also characterized. It gives rise to a set of relevant priors at the social level that can be any subset of the convex hull of the individuals’ sets of relevant priors. The authors then apply these general results to the Maxmin Expected Utility model, the Choquet Expected Utility model and the Smooth Ambiguity model. They end with a characterization of the aggregation of ambiguity attitudes.
    Keywords: Preference Aggregation; Social Choice; Uncertainty
    JEL: D71 D81
    Date: 2014–07–20
  4. By: Banerjee, Debosree
    Abstract: We analyze gender difference in risk and ambiguity attitude of subjects across two different ethnicities that differ in the degree of female empowerment. Santal is a patriarchal tribe and Khasi is a matrilineal tribe with men and women being the social head in their respective societies. We compare subject’s willingness to take up risk and ambiguity for themselves and on behalf of others. Besides we analyze the differences in risk and ambiguity attitude of subjects from these societies. Our findings show that women in both societies are significantly more risk averse, but not ambiguity averse. Patriarchal male and female are more risk averse in group risk than in individual risk but matrilineal subjects are not. Therefore, higher risk aversion in group is an ethnic trait among Santals. Comparing the between ethnicity differences we find that matrilineal subjects are more risk averse than patriarchal subjects. Regarding attitudes towards ambiguity, we did not find any gender or ethnicity differences.
    Keywords: Risk and Ambiguity, Gender, Matrilineal and Patriarchal society, Field experiment, Institutional and Behavioral Economics, Risk and Uncertainty, C93, D81, J15, J16,
    Date: 2014–08
  5. By: Itzhak Gilboa (University of Tel Aviv); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Yale University and HEC Paris)
    Abstract: People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the memories that consumption generates. A memorable good, such as a honeymoon or a vacation, is a good whose mental consumption outlives its physical consumption. We consider a model in which a consumer enjoys physical consumption as well as memories. Memories are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. The model shows how rational consumers, taking into account their future memories, would make optimal choices that rationalize lumpy patterns of consumption.
    Keywords: Memorable goods, memory utility, consumption smoothing
    JEL: D91
    Date: 2015–01–21
  6. By: Nikolay Klemashev; Alexander Shananin
    Abstract: This paper is devoted to revealed preference theory and its applications to testing economic data for consistency with utility maximization hypothesis, construction of index numbers, and forecasting. The quantitative measures of inconsistency of economic data with utility maximization behavior are also discussed. The structure of the paper is based on comparison between the two tests of revealed preference theory - generalized axiom of revealed preference (GARP) and homothetic axiom of revealed prefernce (HARP). We do this comparison both theoretically and empirically. In particular we assess empirically the power of these tests for consistency with maximization behavior and the size of forecasting sets based on them. For the forecasting problem we show that when using HARP there is an effective way of building the forecasting set since this set is given by the solution of the system of linear inequalities. The paper also touches upon the question of testing a set of Engel curves rather than finite set of observations for consistency with utility maximization behavior and shows that this question has effective solution when we require the rationalizing utility function to be positively homogeneous.
    Date: 2015–01
  7. By: Nicholas Bloom
    Abstract: This review article tries to answer four questions: (i) what are the stylized facts about uncertainty over time; (ii) why does uncertainty vary; (iii) do fluctuations in uncertainty matter; and (iv) did higher uncertainty worsen the Great Recession of 2007-2009? On the first question both macro and micro uncertainty appears to rise sharply in recessions. On the second question the types of exogenous shocks like wars, financial panics and oil price jumps that cause recessions appear to directly increase uncertainty, and uncertainty also appears to endogenously rise further during recessions. On the third question, the evidence suggests uncertainty is damaging for short-run investment and hiring, but there is some evidence it may stimulate longer-run innovation. Finally, in terms of the Great Recession, the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in GDP.
    Keywords: uncertainty; risk; volatility; investment
    JEL: Q54
    Date: 2013–12
  8. By: Barry O'Neill
    Abstract: Many disputes involve conflicts of rights. A common view is that rights cannot really be in conflict so one of those being claimed must be a mistake. This idea leads to extreme outcomes that cut some parties out. Many studies have investigated how to choose a compromise among rights but they have focus on situations where the incompatibility comes from the degrees of the claims, as when, for example, a deceased person promised his heirs more than his total estate. I analyze a Talmudic problem where the difficulty is the pattern of the rights - each one trumps another in a cycle. The theory of non-transferable utility coalitional games suggests two solutions, one based on Shapley's and Maschler-Owen's values, which are equivalent for the problem, and the other on Harsanyi's and Kalai-Samet's, also equivalent. Each satisfies four out of five desirable properties, better than several other solutions. The NTU games are appropriate not just for power-based negotiation but for disputes over justice, fairness and rights. It is hoped that this analysis will form part of a general understanding of rights conflicts.
    Date: 2014–12
  9. By: Rappaport, Jordan (Federal Reserve Bank of Kansas City)
    Abstract: This paper argues that centralized employment remains an empirically relevant stylization of midsize U.S. metros. It extends the monocentric model to explicitly include leisure as a source of utility but constrains workers to supply fixed labor hours. Doing so sharpens the marginal disutility from longer commutes. The numerical implementation calibrates traffic congestion to tightly match observed commute times in Portland, Oregon. The implied geographic distribution of CBD workers' residence tightly matches that of Portland. The implied population density, land price, and house price gradients approximately match empirical estimates. Variations to the baseline calibration build intuition on underlying mechanics.
    Keywords: Urban Land Use; Commuting; Leisure; Value of Time
    JEL: R12 R14 R41
    Date: 2014–11–01
  10. By: Michail Anthropelos; Michael Kupper; Antonis Papapantoleon
    Abstract: We consider a market model that consists of financial investors and producers of a commodity. Producers optionally store some production for future sale and go short on forward contracts to hedge their future commodity price uncertainty. On the other hand, speculators invest in these contracts to diversify their portfolios. The forward and the spot equilibrium commodity prices are endogenously derived as the outcome of the interaction between producers and speculators. Assuming that both are utility maximizers and that the demand shocks and the exogenously priced financial market are correlated, we provide semi-explicit expressions for the equilibrium prices and analyze their dependence on the model parameters. The model can explain why increased speculators' participation in forward commodity markets and higher correlation between the commodity and the stock market could result in higher spot prices and lower forward premia.
    Date: 2015–02
  11. By: Juan V. Luciano; Francesco D’Amico; Marta Cerdà-Lafont; María T. Peñarrubia-María; Martin Knapp; Antonio I. Cuesta-Vargas; Antoni Serrano-Blanco; Javier García-Campayo
    Abstract: Introduction:- Cognitive behavioral therapy (CBT) and U.S. Food and Drug Administration (FDA)-recommended pharmacologic treatments (RPTs; pregabalin, duloxetine, and milnacipran) are effective treatment options for fibromyalgia (FM) syndrome and are currently recommended by clinical guidelines. We compared the cost-utility from the healthcare and societal perspectives of CBT versus RPT (combination of pregabalin + duloxetine) and usual care (TAU) groups in the treatment of FM. Methods:- The economic evaluation was conducted alongside a 6-month, multicenter, randomized, blinded, parallel group, controlled trial. In total, 168 FM patients from 41 general practices in Zaragoza (Spain) were randomized to CBT (n = 57), RPT (n = 56), or TAU (n = 55). The main outcome measures were Quality-Adjusted Life Years (QALYs, assessed by using the EuroQoL-5D questionnaire) and improvements in health-related quality of life (HRQoL, assessed by using EuroQoL-5D visual analogue scale, EQ-VAS). The costs of healthcare use were estimated from patient self-reports (Client Service Receipt Inventory). Cost-utility was assessed by using the net-benefit approach and cost-effectiveness acceptability curves (CEACs). Results:- On average, the total costs per patient in the CBT group (1,847€) were significantly lower than those in patients receiving RPT (3,664€) or TAU (3,124€). Patients receiving CBT reported a higher quality of life (QALYs and EQ-VAS scores); the differences between groups were significant only for EQ-VAS. From a complete case-analysis approach (base case), the point estimates of the cost-effectiveness ratios resulted in dominance for the CBT group in all of the comparisons performed, by using both QALYs and EQ-VAS as outcomes. These findings were confirmed by bootstrap analyses, net-benefit curves, and CEACs. Two additional sensitivity analyses (intention-to-treat analysis and per-protocol analysis) indicated that the results were robust. The comparison of RPT with TAU yielded no clear preference for either treatment when using QALYs, although RPT was determined to be more cost-effective than TAU when evaluating EQ-VAS. Conclusions:- Because of lower costs, CBT is the most cost-effective treatment for adult FM patients. Implementation in routine medical care would require policymakers to develop more-widespread public access to trained and experienced therapists in group-based forms of CBT. Trial registration:- Current Controlled Trials ISRCTN10804772. Registered 29 September 2008.
    JEL: N0
    Date: 2014–10

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