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on Utility Models and Prospect Theory |
| By: | Harin, Alexander |
| Abstract: | This short paper is devoted to two items: 1) An analysis of Prelec’s weighting function at the probability p = 1 is highlighted (this analysis was performed by R. Duncan Luce in two articles with Ragnar Steingrimsson and János Aczél and here is referred to as the “Luce problem”). 2) The question of possible discontinuity of Prelec’s weighting function at p = 1 is specially considered, as a manifestation of importance of the “Luce problem.” |
| Keywords: | Luce, Prelec; utility; prospect theory; probability weighting function; |
| JEL: | C1 C9 D8 D81 |
| Date: | 2015–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63672&r=upt |
| By: | Julio Backhoff; Francisco Silva |
| Abstract: | We examine the issue of sensitivity with respect to model parameters for the problem of utility maximization from final wealth in an incomplete Samuelson model and mainly for utility functions of power-type. The method consists in moving the parameters through change of measure, which we call a weak perturbation, in particular decoupling the usual wealth equation from the varying parameters. By rewriting the maximization problem in terms of a convex-analytical support function of a weakly-compact set, crucially leveraging on the recent work by Backhoff and Fontbona arXiv:1405.0251, the previous formulation let us prove the Hadamard directional differentiability of the value function w.r.t. the drift and interest rate parameters, as well as for volatility matrices under a stability condition on their Kernel, and derive explicit expressions for the directional derivatives. We contrast our proposed weak perturbations against what we call strong perturbations, whereby the wealth equation is directly influenced by the changing parameters, and find that both points of view generally yield different sensitivities unless e.g. if initial parameters and their perturbations are deterministic. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.02734&r=upt |
| By: | Paola Manzini (University of St Andrews and IZA); Marco Mariotti (Queen Mary University of London) |
| Abstract: | We propose a theory of choices that are influenced by the psychological state of the agent. The central hypothesis is that the psychological state controls the urgency of the attributes sought by the decision maker in the available alternatives. While state dependent choice is less restricted than rational choice, our model does have empirical content, expressed by simple ‘revealed preference’ type of constraints on observable choice data. We demonstrate the applicability of simple versions of the framework to economic contexts. We show in particular that it can explain widely researched anomalies in the labour supply of taxi drivers. |
| Keywords: | Bounded rationality, procedural rationality, utility maximization, choice behavior. |
| JEL: | D01 |
| Date: | 2015–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1505&r=upt |
| By: | Gaurab Aryal; Dong-Hyuk Kim |
| Abstract: | We study the identification and estimation of first-price auction models where bidders have ambiguity about the valuation distribution and their preferences are represented by maxmin expected utility. When entry is exogenous, the distribution and ambiguity structure are nonparametrically identified, separately from risk aversion (CRRA). We propose a flexible Bayesian method based on Bernstein polynomials. Monte Carlo experiments show that our method estimates parameters precisely, and chooses reserve prices with (nearly) optimal revenues, whether there is ambiguity or not. Furthermore, if the model is misspecified -- incorrectly assuming no ambiguity among bidders -- it may induce estimation bias with a substantial revenue loss. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.02516&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:14/336&r=upt |
| By: | Jean-Paul Chavas (Department of Economics (University of Verona)); Martina Menon (Department of Economics (University of Verona)); Elisa Pagani (Department of Economics (University of Verona)); Federico Perali (Department of Economics (University of Verona)) |
| Abstract: | Abstract We investigate the relationship between centralized and decentralized collective demand models applied to consumption within a household with multiple individuals. The centralized program is described by a Bergsonian representation of the household utility function and a household budget constraint, while the decentralized program is described by individual utility maximization subject to an income allocation among individual. The household income allocation among individuals involves an income sharing rule. We show that, in general, income shares are equal to the product of two weights: the Bergsonian weight and a weight reflecting income effects across individuals. We also show that the latter weights play a role in income sharing and in household welfare evaluation when individual preferences depart from quasi-homotheticity. We also examine how individual preferences affect the relationship between centralized and decentralized demand. |
| Keywords: | Collective household model, Pareto weight, Sharing rule. |
| JEL: | D11 D12 D13 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:13/2015&r=upt |
| By: | Chung, Hui-Kuan ; Glimcher, Paul; Tymula, Agnieszka |
| Abstract: | Prospect Theory (Kahneman and Tversky 1979), one of the most prominent models for valuation of goods and money, presumes that people have convex utility over gains and concave utility over losses; a discontinuity at something like the current wealth level or reference point. This reflects a behavioral pattern confirmed in hundreds of experimental studies where in lottery tasks people show decreasing marginal utility over gains (risk aversion) and increasing marginal utility (risk seeking) over losses relative to this ?reference?. Although it is widely assumed that a reference point is also required to describe riskless choices made over bundles of goods, there is less empirical evidence for this claim. In this paper, using incentive-compatible experimental methods, we challenge the generality of this assumption. We find that in riskless choice over bundles of goods in a canonical budget set experiment, gain-loss asymmetries are not observed even while in interleaved lottery tasks the reference point is observed, in the same subjects. Our results suggest a discontinuity between the value functions inferred from choices over standard lotteries and the utility functions inferred from indifference curves in riskless choice. |
| Keywords: | Indifference curve, Riskless Choice, Reflection effect; Reference point; Losses |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2015-07&r=upt |