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on Utility Models and Prospect Theory |
| By: | Kocher, Martin G.; Lahno, Amrei Marie; Trautmann, Stefan T. |
| Abstract: | An extensive literature has studied ambiguity aversion in economic decision making, and how ambiguity aversion can account for empirically observed violations of expected utility-based theories. Almost all relevant applied models presume a general dislike of ambiguity. In this paper, we provide a systematic experimental assessment of ambiguity attitudes in different likelihood ranges and in the gain domain, the loss Domain and with mixed outcomes. We draw on a unified framework with more than 500 participants and find that ambiguity aversion is the exception, not the rule. We replicate the usual finding of ambiguity aversion for moderate likelihood gains. However, when introducing losses or lower likelihoods, we observe either ambiguity neutrality or even ambiguity seeking behavior. Our results are robust to different elicitation procedures. |
| Keywords: | ambiguity aversion; decision under uncertainty; Ellsberg experiments |
| JEL: | C91 D81 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:23817&r=upt |
| By: | David Freeman (Simon Fraser University) |
| Abstract: | Calibration results in Rabin (2000) and Safra and Segal (2008; 2009) suggest that both expected and non-expected utility theories cannot produce non-negligible risk aversion over small stakes without producing implausible risk aversion over large stakes. This paper provides calibration results for recursive non-expected utility theories that relax the Reduction of Compound Lotteries axiom (as in Segal 1990). These calibration results imply that a broad class of non-expected utility theories can accommodate both small and large stakes risk aversion, even for a decision-maker who faces background risk. |
| Keywords: | risk aversion, calibration, non-expected utility theories, recursive preferences. |
| JEL: | D81 |
| Date: | 2015–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp15-01&r=upt |
| By: | Craig S. Webb |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1503&r=upt |
| By: | David Dillenberger (Department of Economics, University of Pennsylvania); Uzi Segal (Department of Economics, Boston College and Warwick Business School) |
| Abstract: | We study the attitude of decision makers to skewed noise. For a binary lottery that yields the better outcome with probability $p$, we identify noise around $p$, with a compound lottery that induces a distribution over the exact value of the probability and has an average value p. We propose and characterize a new notion of skewed distributions, and use a recursive non-expected utility model to provide conditions under which rejection of symmetric noise implies rejection of skewed to the left noise as well. We demonstrate that rejection of these types of noises does not preclude acceptance of some skewed to the right noise, in agreement with recent experimental evidence. We apply the model to study random allocation problems (one-sided matching) and show that it can predict systematic preference for one allocation mechanism over the other, even if the two agree on the overall probability distribution over assignments. The model can also be used to address the phenomenon of ambiguity seeking in the context of decision making under uncertainty. |
| Keywords: | Skewed distributions, recursive non-expected utility, ambiguity seeking, one-sided matching |
| JEL: | D81 C78 |
| Date: | 2015–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:15-015&r=upt |
| By: | Christian Keller; David Reinstein; Gerhard Riener; Michael Sanders |
| Abstract: | When and how should a fundraiser ask for a donation from an individual facing an uncertain bonus income? A standard model of expected utility over outcomes predicts that the individual’s before choice – her ex-ante commitment conditional on her income – will be the same as her choice after the income has been revealed. Deciding “if you win, how much will you donate?” involves a commitment (i) over a donation for a state of the world that may not be realized and (ii) over uncertain income. Models involving reference-dependent utility, tangibility, and self-signaling predict more giving before, while theories of affect predict more giving after. In our online field experiment at a UK university, as well as in our laboratory experiments in Germany, charitable giving was significantly larger in the Before treatment than in the After treatment for male subjects, with a significant gender differential. |
| JEL: | D64 C91 L30 D01 D84 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:13/336&r=upt |
| By: | Riccardo M. Masolo (Bank of England); Francesca Monti (Bank of England; Centre for Macroeconomics (CFM)) |
| Abstract: | We study a prototypical new-Keynesian model in which agents are averse to ambiguity, and where the ambiguity regards the monetary policy rule. We show that ambiguity has important effects even in steady state, as uncertainty about the policymaker’s response function affects the rest of the model via the consumption-saving decision. A reduction in ambiguity - e.g. due to credible monetary policy actions and communications - results in a fall in inflation and the policy rate, and an increase in welfare. Moreover while, absent ambiguity, the policymaker’s actual responsiveness to inflation does not matter as long as the Taylor principle is satisfied, in the face of ambiguity the exact degree to which the central bank responds to inflation regains importance. Indeed, a high degree of responsiveness to inflation mitigates the welfare costs of ambiguity. We also present various results regarding the optimal choice of an inflation target, both when ambiguity is given and when assuming the policymaker can affect ambiguity with increased transparency and communications. |
| Keywords: | Ambiguity, aversion, monetary policy |
| JEL: | D84 E31 E43 E52 E58 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1506&r=upt |
| By: | Noldeke, Georg (University of Basel); Larry Samuelson (Cowles Foundation, Yale University) |
| Abstract: | We use the theory of abstract convexity to study adverse-selection principal-agent problems and two-sided matching problems, departing from much of the literature by not requiring quasilinear utility. We formulate and characterize a basic underlying implementation duality. We show how this duality can be used to obtain a sharpening of the taxation principle, to obtain a general existence result for solutions to the principal-agent problem, to show that (just as in the quasilinear case) all increasing decision functions are implementable under a single crossing condition, and to obtain an existence result for stable outcomes featuring positive assortative matching in a matching model. |
| Keywords: | Implementation, Duality, Galois connection, Imperfectly transferable utility, Principal-agent model, Two-sided matching |
| JEL: | C62 C78 D82 D86 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1993&r=upt |
| By: | Boualem Djehiche; Peter Helgesson |
| Abstract: | In this paper we study a generalization of the continuous time Principal-Agent problem allowing for time inconsistent utility functions, for instance of mean-variance type. Using recent results on the Pontryagin maximum principle for FBSDEs we suggest a method of characterizing optimal contracts for such models. To illustrate this we consider a fully solved explicit example in the linear quadratic setting. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1503.05416&r=upt |
| By: | Itzhak Gilboa (HEC, Paris, and Tel-Aviv University); Andrew Postlewaite (Department of Economics, University of Pennsylvania); David Schmeidler (Tel-Aviv University, the Ohio State University, and the InterDisciplinary Center at rzliya) |
| Abstract: | A literal interpretation of neo-classical consumer theory suggests that the consumer solves a very complex problem. In the presence of indivisible goods, the consumer problem is NP-Hard, and it appears unlikely that it can be optimally solved by humans. An alternative approach is suggested, according to which the household chooses how to allocate its budget among product categories without necessarily being compatible with utility maximization. Rather, the household has a set of constraints, and among these it chooses an allocation in a case-based manner, influenced by choices of other, similar households, or of itself in the past. We offer an axiomatization of this model. |
| Keywords: | Imitation, case-based decisions, rules of thumb, Consumer choice, complexity |
| JEL: | D11 |
| Date: | 2015–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:15-013&r=upt |
| By: | Hirbod Assa |
| Abstract: | The aims of this study are twofold. First, we consider an optimal risk allocation problem with non-convex preferences. By establishing an infimal representation for distortion risk measures, we give some necessary and sufficient conditions for the existence of optimal and asymptotic optimal allocations. We will show that, similar to a market with convex preferences, in a non-convex framework with distortion risk measures the boundedness of the optimal risk allocation problem depends only on the preferences. Second, we consider the same optimal allocation problem by adding a further assumption that allocations are co-monotone. We characterize the co-monotone optimal risk allocations within which we prove the "marginal risk allocations" take only the values zero or one. Remarkably, we can separate the role of the market preferences and the total risk in our representation. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1503.04460&r=upt |
| By: | Houser, Daniel (George Mason University); List, John A. (University of Chicago); Piovesan, Marco (University of Copenhagen); Samek, Anya (University of Wisconsin-Madison); Winter, Joachim K. (University of Munich) |
| Abstract: | Acts of dishonesty permeate life. Understanding their origins, and what mechanisms help to attenuate such acts is an underexplored area of research. This study takes an economics approach to explore the propensity of individuals to act dishonestly across different economic environments. We begin by developing a simple model that highlights the channels through which one can increase or decrease dishonest acts. We lend empirical insights into this model by using an experiment that includes both parents and their young children as subjects. We find that the highest level of dishonesty occurs in settings where the parent acts alone and the dishonest act benefits the child rather than the parent. In this spirit, there is also an interesting effect of children on parents' behavior: in the child's presence, parents act more honestly, but there are gender differences. Parents act more dishonestly in front of sons than daughters. This finding has the potential of shedding light on the origins of the widely documented gender differences in cheating behavior observed among adults. |
| Keywords: | cheating, dishonesty, ethical judgment, social utility, field experiment |
| JEL: | C91 D63 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8906&r=upt |
| By: | Hans Gersbach (ETH Zurich, Switzerland); Hans Haller (Virginia Polytechnic Institute) |
| Abstract: | We integrate individual power in groups into general equilibrium models with endogenous group formation. We distinguish between formal power (the say in group decisions) and real power (utility gain from being in groups). Their values will be determined as part of the equilibrium. We find that higher formal power does not necessarily translate into higher equilibrium utility or higher real power. One reason is that induced price changes may offset the groupmember’s increased influence. A second reason is that the group may dissolve when a group member gains too much influence, because other members can exercise the option to leave. We also show that maximal real power can be compatible with Pareto efficiency. We further identify circumstances when changes of formal power in one group do not impact on other groups. Finally, we establish existence of competitive equilibria, including equilibria where some individual enjoys real power. |
| Keywords: | Group formation, competitive markets, power, exit |
| JEL: | D41 D50 D60 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:15-212&r=upt |
| By: | Dridi, Dhouha; Ben Youssef, Slim |
| Abstract: | In this paper, we consider a static model for advertising strategies and pricing decisions in supply chain with one monopolistic manufacturer and two duopolistic retailers. We assume an additive form of the consumer demand which is influenced by retail price and advertising. The manufacturer sets the wholesale price, invests in advertising (at national level) and offers cooperative advertising to boost the advertising expenditures of their retailers. The retailers set the retail price and invest in advertising (at local level). By means of game theory, we discuss three different relationships between the supply chain members: two non cooperative games including the Stackelberg – Cournot and the Stackelberg – Collusion and one cooperative game. The comparison between the three models reveals that the advertising, the pricing, the consumer demand and the profits are affected by various relationships. Furthermore, under the cooperation situation, we propose a channel coordination mechanism through a manufacturer’s participation rate in retailers’ local advertising cost and wholesale price by using utility function. |
| Keywords: | Game theory, supply chain, cooperative advertising, pricing, retail competition, retail coalition, coordination mechanism. |
| JEL: | C7 D6 M3 |
| Date: | 2015–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62705&r=upt |
| By: | Tatsuyoshi Saijo (School of Management, Kochi University of Technology) |
| Abstract: | This paper proposes an alternative explanation for the sandwich property in voluntary contribution mechanism experiments. This property refers to the phenomenon of experimental data being ``sandwiched'' between a Nash equilibrium above the midpoint of the endowment and a Nash equilibrium below this midpoint. The explanation is in terms of the instability of the system with best response dynamics, i.e., ``pulsing'' behaviors, in nonlinear environments rather than the quantal response equilibrium analysis. Since most experimental models are unstable in quasilinear environments (where the utility function is linear in a private good and nonlinear in a public good), and Cobb–Douglas environments, using equilibrium analysis is problematic. |
| JEL: | C62 C72 C92 H41 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:kch:wpaper:sdes-2015-13&r=upt |