nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒10‒10
six papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Ecumenical foundations? On the coexistence of Austrian and neoclassical views on utility By Senderski, Marcin
  2. An existence theorem for bounds on the expectation of a random variable. Its opportunities for utility theories. V. 2 By Harin, Alexander
  3. Information Characteristics and Errors in Expectations: Experimental Evidence By Antoniou, Constantinos; Harrison, Glenn; Lau, Morten; Read, Daniel
  4. First-Order and Second-Order Ambiguity Aversion By Matthias Lang
  5. Relative Injustice Aversion By Luis José Blas Moreno Garrido
  6. Utilitarian population ethics and births timing By Grégory Ponthière

  1. By: Senderski, Marcin
    Abstract: Utility has long been a debatable concept, with many competing interpretations. The Austrian school and the neoclassical school, however broad these categories may seem, have made the most substantial and, by the same token, the most contrasting contributions to the theory of value. The paper’s goal is not to adjudicate past arguments or observe the evolution of the theory, but rather to resolve contemporary misunderstandings. The references are made to such trouble spots as subjectivism vs. objectivism, cardinality vs. ordinality, and mathematical formalism vs. verbal formalism. Both schools entrenched themselves in their views long ago. Nevertheless, this paper shows that discussing utility on common ground and on the basis of shared presumptions is not necessarily the melody of the future. The paper is concluded with recommendations on how the current dissent may be attenuated.
    Keywords: Austria; Austrian school; economic thought; heterodox economics; neoclassical school; utility
    JEL: B41 B53
    Date: 2014
  2. By: Harin, Alexander
    Abstract: An existence theorem is proven for the case of a discrete random variable that can take on only a finite set of possible values. If the random variable takes on values in a finite interval and there is a lower non-zero bound on the modulus of (at least one) its central moment, then non-zero bounds on its expectation exist near the borders of the interval. The revealed bounds can be considered as “forbidden zones” for the expectation. They can be useful, e.g., in utility theories.
    Keywords: probability theory; dispersion; scatter; scattering; noise; economics; utility theory; prospect theory; decision theories; human behavior; Prelec; probability weighting function;
    JEL: C1 D8 D81
    Date: 2015–10–04
  3. By: Antoniou, Constantinos (University of Warwick); Harrison, Glenn (Georgia State University, CEAR); Lau, Morten (Copenhagen Business School); Read, Daniel (University of Warwick)
    Abstract: We design an experiment to test the hypothesis that, in violation of Bayes Rule, some people respond more forcefully to the strength of information than to its weight. We provide incentives to motivate effort, use naturally occurring information, and control for risk attitude. We find that the strength-weight bias affects expectations, but that its magnitude is significantly lower than originally reported. Controls for non-linear utility further reduce the bias. Our results suggest that incentive compatibility and controls for risk attitude considerably affect inferences on errors in expectations.
    Keywords: behavioral biases, market efficiency, experimental finance
    JEL: D81 D84 G11
    Date: 2015–09
  4. By: Matthias Lang (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Different models of uncertainty aversion imply strikingly different economic behavior. The key to understanding these differences lies in the dichotomy between first-order and second-order ambiguity aversion which I define here. My definition and its characterization are independent of specific representations of decisions under uncertainty. I show that with second-order ambiguity aversion a positive exposure to ambiguity is optimal if and only if there is a subjective belief such that the act’s expected outcome is positive. With first-order ambiguity aversion, zero exposure to ambiguity can be optimal. Examples in finance, insurance and contracting demonstrate the economic relevance of this dichotomy.
    Keywords: Uncertainty Aversion, Ambiguity, Smooth Ambiguity Aversion, Sub-jective Beliefs, Kinked preferences
    JEL: D82 D01 D81 G11
    Date: 2015–09
  5. By: Luis José Blas Moreno Garrido (Dpto. Métodos Cuantitativos y Teoría Económica)
    Abstract: I propose a new utility function based on the relative aversion to injustice to explain why, in bargaining games, neither classical equilibria nor inequality aversion equilibria hold when money is not windfall, but it is the result of the effort. This utility function generalizes the concept of inequality aversion when agents have beliefs about what they deserve, and it is able to explain rejections in non zero-sum games. I analyze the agents' behavior and their bargaining power in the dictator game, ultimatum game and (0,1)-ultimatum game and results are compared within those games.
    Keywords: Injustice Aversion, Distribution, Property Rights, Bargaining power
    JEL: D3 D63 D64 P14
    Date: 2015–09
  6. By: Grégory Ponthière (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12, PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: Births postponement is a key demographic trend of the last decades. To examine its social desirability, we study how utilitarian criteria rank histories equal on all dimensions except the age at which individuals give birth to their children. We develop a T-period dynamic overlapping generations economy with a fixed living space, where individual welfare is increasing in the available space per head, and where agents have children in one out of two fertility periods. When comparing finite histories with an equal total number of life-periods, classical, average and critical-level utilitarian criteria select the same fertility timing, i.e. the one leading to the most smoothed population path. When comparing infinite histories with stationary population sizes, utilitarian criteria may select different birth timings, depending on individual utility functions. Those results are compared with the ones obtained when agents value coexistence time with their descendants. Finally, we identify conditions under which a shift from an early births regime to a late births regime is socially desirable.
    Keywords: population ethics,utilitarianism,fertility,birth timing
    Date: 2015–09

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