nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒05‒02
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Fanning-Out or Fanning-In? Continuous or Discontinuous? Estimating Indifference Curves Inside the Marschak-Machina Triangle using Certainty Equivalents. By Kontek, Krzysztof
  2. Singular recursive utility By Kristina R. Dahl; Bernt {\O}ksendal
  4. Relative Social Status and Conflicting Measures of Poverty - A Behavioral Analytical Model By Sugata Marjit; Sattwik Santra; Koushik Kumar Hati
  5. Unifying Portfolio Diversification Measures Using Rao's Quadratic Entropy By Kevin Moran; Benoît Carmichael; Gilles Boevi Koumou
  6. Giving and Probability By Christian Keller; David Reinstein; Gerhard Riener; Michael Sanders
  7. Private ownership economies with externalities and existence of competitive equilibria: A differentiable approach By Elena L. del Mercato; Vincenzo Platino
  8. Consistent Risk Acceptance Criteria through Networks By Cerqueti, Roy; Lupi, Claudio
  9. The sound of others: suprising evidence of conformist behavior By Crosetto, P.; Filippin, A.
  10. The Dynamics of Capital Accumulation in the US: Simulations after Piketty By Philippe De Donder; John E. Roemer

  1. By: Kontek, Krzysztof
    Abstract: This paper introduces a new method of estimating indifference curves in the Marschak-Machina triangle. The method involves posing questions about indifference. Contrary to previous attempts, where subjects were required to identify those lotteries to which they were indifferent vis-à-vis a given lottery, the subjects are here required to determine its certainty equivalent. The procedure is repeated for a large number of lotteries inside the triangle. Simple, linear interpolation of certainty equivalent values between adjacent points representing the lotteries under consideration allows any indifference curve inside the triangle to be plotted. The experimental results presented in the paper shed new light on the shape of indifference curves inside the Marschak-Machina triangle, where curve parallelism, fanning-out, fanning-in and boundary effects, including (possibly discontinuous) jumps, are all common. As shown, those decision-making models, which can predict jumps on the triangle legs, offer the best econometric fit of the indifference curves obtained in the study.
    Keywords: Marschak-Machina triangle, indifference curves, fanning-out, fanning-in, models of decision-making under risk, certainty equivalents, Wolfram Mathematica®
    JEL: C14 C81 C88 C91 D81
    Date: 2015–04–28
  2. By: Kristina R. Dahl; Bernt {\O}ksendal
    Abstract: We introduce the concept of singular recursive utility. This leads to a kind of singular BSDE which, to the best of our knowledge, has not been studied before. We show conditions for existence and uniqueness of a solution for this kind of singular BSDE. Furthermore, we analyze the problem of maximizing the singular recursive utility. We derive sufficient and necessary maximum principles for this problem, and connect it to the Skorohod reflection problem. Finally, we apply our results to a specific cash flow. In this case, we find that the optimal consumption rate is given by the solution to the corresponding Skorohod reflection problem.
    Date: 2015–04
  3. By: Valerio Gatta (University of Roma Tre and CREI); Edoardo Marcucci (University of Roma Tre and CREI)
    Abstract: This paper derives policy implications concerning a specifically developed questionnaire administration procedure aimed at eliciting agent-s pecific preferences for alternative policy variables with respect to the implementation of pol icy changes in the case of urban freight transport. In particular the research, based on the case of Rome’s Limited Traffic Zone, discusses alternative policy implementations whose impact can be tested ex-ante given the elicitation method adopted. After describing attribute definition and selection, questionnaire administration, data collection and treatment, will ingness to pay estimates are calculated. The paper tests, from a policy-maker’s perspective, the implications deriving from the presence of inter-agent heterogeneity and the specific composition of an improving and equally impacting policy on all agent-types’ utility. The paper shows how an agent-specific approach might increase decision makers’ awareness and help them taking better decisions.
    Keywords: urban freight policy, agent-type heterogeneity, ex-ante reactions, stated preferences, discrete choice modelling, and willingness to pay
    Date: 2014
  4. By: Sugata Marjit (Centre for Studies in Social Sciences, Calcutta); Sattwik Santra (Centre for Studies in Social Sciences, Calcutta); Koushik Kumar Hati (Centre for Studies in Social Sciences, Calcutta)
    Abstract: We consider a situation where the relatively ‘poor’ are concerned about their relative income status with respect to a relevant reference group. Such a concern is explicitly introduced in a utility function to study the consumption behavior of the poor. We point towards a possible conflict between income based and nutrition- based measure of poverty. Changes in income distribution generate non-homothetic outcome for an “otherwise homothetic†preference structure and may convert an “otherwise normal†good into an inferior good.
    Keywords: Status,Consumption pattern,Inequality,Poverty
    JEL: C13 D01 D12 O40
    Date: 2015–04–24
  5. By: Kevin Moran; Benoît Carmichael; Gilles Boevi Koumou
    Abstract: This paper extends the use of Rao (1982b)'s Quadratic Entropy (RQE) to modern portfolio theory. It argues that the RQE of a portfolio is a valid, exible and unifying approach to measuring portfolio diversification. The paper demonstrates that portfolio's RQE can encompass most existing measures, such as the portfolio variance, the diversification ratio, the normalized portfolio variance, the diversification return or excess growth rates, the Gini-Simpson indices, the return gaps, Markowitz's utility function and Bouchaud's general free utility. The paper also shows that assets selected under RQE can protect portfolios from mass destruction (systemic risk) and an empirical illustration suggests that this protection is substantial.
    Keywords: Portfolio diversification, Rao's quadratic entropy, diversification return, diversification ratio, portfolio variance normalized, Gini-Simpson index, Markowitz's utility, function, Bouchaud's General free utility,
    JEL: G11
    Date: 2015–04–16
  6. 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
  7. By: Elena L. del Mercato (Paris School of Economics - Centre d'Economie de la Sorbonne); Vincenzo Platino (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: We consider a general equilibrium model of a private ownership economy with consumption and production externalities. Utility functions and production technologies may be affected by the consumption and production activities of all other agents in the economy. We use differential techniques to show that the set of competitive equilibria is non-empty and compact. Fixing the externalities, the assumptions on utility functions and production technologies are standard in a differentiable framework. Competitive equilibria are written in terms first-order conditions associated with agents' behavior and market clearing conditions, following the seminal work by Smale (1974). Adapting differential techniques to economies with externalities is non trivial and it requires some ingenious adjustments, because the production technologies are not required to be convex with respect to the consumption and production activities of all agents
    Keywords: Externalities; private ownership economy; competitive equilibrium; differentiable approach
    JEL: C62 D51 D62
    Date: 2015–04
  8. By: Cerqueti, Roy; Lupi, Claudio
    Abstract: In decision theory projects are usually evaluated in terms of their riskiness, and often decision under risk is intended as the one-shot-type binary choice of accepting or not accepting the risk. This paper elaborates on the concept of risk acceptance, and aims at developing a theoretical framework based on networks theory. In doing this, the interconnections between the random quantities involved in the decision are taken into account. The conditions to be satisfied in order for the risk-acceptance criterion to be consistent with the axiomatization of standard expected utility theory are also explored. In accordance with existing literature, we obtain that a risk evaluation problem can be meaningful even if it is not consistent with the standard axiomatization of expected utility. Some illustrative examples are also provided.
    Keywords: Risk acceptance, networks, decision theory, expected utility, insurance
    JEL: D81 D85 G22
    Date: 2015–04–20
  9. By: Crosetto, P.; Filippin, A.
    Abstract: It has been shown that subjects tend to follow others’ behavior even when the external signals are uninformative. In this paper we go one step further, showing that conformism occurs even when the choices of others are not even presented to the subjects, but just indirectly perceived. We use the “Click” version of the Bomb Risk Elicitation Task, in which subjects can infer the behavior of others only from the mass of clicks heard. This signal is payoff-irrelevant and largely uninformative about the actual choices of the other participants. Moreover, it is never mentioned in the instructions and therefore it must be spontaneously (and possibly unconsciously) perceived in order to be used. We control the exposure of subjects to clicks by implementing treatments with and without earmuffs. Moreover, we test whether the introduction of a minimal form of commonality, i.e., facing a common rather than individual resolution of uncertainty, makes conformism more likely to emerge. We find strong evidence of conformist behavior even in such an adverse environment. Simply hearing the others clicking affects subjects’ behavior. Introducing a common random draw results in a further dramatic shift of the average choices, in particular by women.
    JEL: C81 C91 D81
    Date: 2015
  10. By: Philippe De Donder (Toulouse School of Economics); John E. Roemer (Dept. of Political Science & Cowles Foundation, Yale University)
    Abstract: We calibrate a sequence of four nested models to study the dynamics of wealth accumulation. Individuals maximize a utility function whose arguments are consumption and investment. They desire to accumulate wealth for its own sake — this is not a life-cycle model. A competitive firm produces a single good from labor and capital; the rate of return to capital and the wage rate are market-clearing. The second model introduces political lobbying by the wealthy, whose purpose is to reduce the tax rate on capital income. The third model introduces differential rates of return to capitals of different sizes. The fourth model introduces inheritance and intergenerational mobility.
    Keywords: Piketty, Dynamics of wealth accumulation, Intergenerational mobility, Kantian equilibrium
    JEL: D31 D58 E37
    Date: 2015–04

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