nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒12‒01
fifteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Rational Choice with Category Bias By Maltz, Amnon
  2. Experience Based Dynamic Choice: A Revealed Preference Approach By Maltz, Amnon
  3. A Generalized Probability Framework to Model Economic Agents' Decisions Under Uncertainty By Emmanuel Haven; Sandro Sozzo
  4. Risk Preferences, Risk Perceptions, and Risky Food By Petrolia, Daniel
  5. The Effect of Ambiguity on Status Quo Bias: An Experimental Study By Maltz, Amnon; Romagnoli, Giorgia
  6. Risk sharing in a world economy with uncertainty shocks By Robert Kollmann
  7. The coming breakthrough in risk research By Jaeger, Carlo
  8. Uncertainty aversion and heterogeneous beliefs in linear models By Pavel Krivenko; Martin Schneider; Cosmin Ilut
  9. A simple framework for the axiomatization of exponential and quasi-hyperbolic discounting By Nina Anchugina
  10. The Nature and Predictive Power of Preferences: Global Evidence By Falk, Armin; Becker, Anke; Dohmen, Thomas; Enke, Benjamin; Huffman, David B.; Sunde, Uwe
  11. Colombian Emigration by Administrative Regions By Saenz, Mariana; Lewer, Joshua J.
  12. Cognitive ability and the effect of strategic uncertainty By Nobuyuki Hanaki; Nicolas Jacquemet; Stéphane Luchini; Adam Zylbersztejn
  13. One-Child Policy, Marriage Distortion, and Welfare Loss By Huang, Wei; Zhou, Yi
  14. Producer preferences for contracts on a risky bioenergy crop By Krah, Kwabena; Petrolia, Daniel; Williams, Angelica; Coble, Keith; Harri, Ardian; Rejesus, Roderick
  15. Ambiguity, monetary policy and trend inflation By Masolo, Riccardo; Monti, Francesca

  1. By: Maltz, Amnon (Department of Economics, University of Haifa)
    Abstract: This paper develops, using the revealed preference approach, a model of choice with an initial endowment and in the presence of alternatives that are grouped into categories. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of an initial endowment. Given an exogenous endowment, our decision maker follows a 3-step procedure: First, she identifies the best alternative in the choice set which belongs to the same category as her endowment. This alternative serves as her endogenous reference point which in turn, at the second step, induces a “psychological constraint”. Finally, she chooses the best feasible alternative in her constraint set according to her reference-free utility. The model gives rise to a “category bias” which generalizes the status quo bias by attracting the decision maker towards the endowment’s category but not necessarily towards the endowment itself. It also accommodates recent experimental findings on the absence of status quo bias among goods which belong to the same category. We apply the model to a financial choice problem and show that category bias may lead to a risk premium even with risk neutral agents.
    Keywords: Status Quo Bias, Categories, Reference Dependence, Risk Premium, Revealed Preference
    JEL: D03 D11
    Date: 2015–10–08
  2. By: Maltz, Amnon (Department of Economics, University of Haifa)
    Abstract: We use the revealed preference method to derive a model of dynamic choice where the agent’s past experience may influence her current decisions. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of experience. As the agent gains experience her utility changes but only in a very restricted fashion. Every period, after an alternative is chosen, the utility of that, and only that alternative, may change while the utility of all other alternatives remains fixed. The model provides a platform on which many behavioral dynamic phenomena may be examined. We utilize it and look into the behavioral implications of bounded memory, status quo bias and variety seeking.
    Keywords: Experience, Dynamic Choice, Memory, Status Quo Bias, Revealed Preference
    JEL: D11 D83
    Date: 2015–09–28
  3. By: Emmanuel Haven; Sandro Sozzo
    Abstract: The applications of techniques from statistical (and classical) mechanics to model interesting problems in economics and finance has produced valuable results. The principal movement which has steered this research direction is known under the name of `econophysics'. In this paper, we illustrate and advance some of the findings that have been obtained by applying the mathematical formalism of quantum mechanics to model human decision making under `uncertainty' in behavioral economics and finance. Starting from Ellsberg's seminal article, decision making situations have been experimentally verified where the application of Kolmogorovian probability in the formulation of expected utility is problematic. Those probability measures which by necessity must situate themselves in Hilbert space (such as `quantum probability') enable a faithful representation of experimental data. We thus provide an explanation for the effectiveness of the mathematical framework of quantum mechanics in the modeling of human decision making. We want to be explicit though that we are not claiming that decision making has microscopic quantum mechanical features.
    Date: 2015–11
  4. By: Petrolia, Daniel
    Abstract: This paper presents the results of a study that tests the hypothesis that the effect of risk preference on choice is a function of the specific risk-preference measure utilized. In addition, this study tests the hypothesis that the effect of risk preference on choice depends upon its interaction with risk perceptions. I elicit three distinct measures of risk preference: a standard real-money Holt and Laury measure, a hypothetical health-variant of the Holt and Laury measure, and a non-context-specific self-assessment measure. I also elicit information regarding risk perceptions. These data are combined with choice data focused on consumer preferences for raw oysters. Results indicate that, after controlling for key oyster attributes, perceived food safety risk is highly significant. Additionally, risk preference is significant, and the effect depends on whether respondents held ex ante food safety perceptions. In a treatment that includes only named oyster varieties, I find that although respondents generally prefer named Atlantic coast oysters to named Gulf and Pacific coast oysters, those who hold ex ante food safety perceptions are significantly more likely to choose Gulf coast oysters as the magnitude of risk aversion increases. In another treatment that includes a generic “commodity” Gulf coast oyster, I find that although named Gulf coast oysters are preferred to the commodity Gulf coast oyster, respondents with no ex ante food safety perceptions are significantly less likely to choose named Gulf coast oysters as the magnitude of risk aversion increases.
    Keywords: belief, oyster, survey, Food Consumption/Nutrition/Food Safety, Risk and Uncertainty, D12, D83,
    Date: 2015–11
  5. By: Maltz, Amnon (Department of Economics, University of Haifa); Romagnoli, Giorgia (New York University)
    Abstract: We conduct an experiment to determine the effect of ambiguity on status quo bias. We find no evidence of the bias in the absence of ambiguity and when ambiguity is present both in the status quo option and the alternative. We do find evidence for status quo bias under asymmetric presence of ambiguity, i.e. when the status quo option is non-ambiguous and the alternative is, or when the status quo option is ambiguous and the alternative is not. These findings are not predicted by the existing models of choice with initial endowment, such as the loss aversion model by Kahneman and Tversky (1979) and the incomplete preferences model by Bewley (1986). Our results, combined with the evidence from the endowment effect literature, suggest that dissimilarity between options may be an important determinant of the status quo bias.
    Keywords: Status Quo Bias, Risk, Ambiguity, Reference Effects.
    JEL: C91 D11 D81
    Date: 2015–10–20
  6. By: Robert Kollmann
    Abstract: This paper analyzes the effects of output volatility shocks and of risk appetite shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country world with recursive preferences and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, in equilibrium; this raises its consumption, lowers its trade balance and appreciates its real exchange rate. The effects of risk appetite shocks resemble those of volatility shocks. In a recursive preferences-complete markets framework, volatility and risk appetite shocks account for a noticeable share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption growth and the real exchange rate.
    Keywords: External balance, exchange rate, volatility, risk appetite, consumption-real exchange rate anomaly.
    JEL: F31 F32 F36 F41 F43
    Date: 2015–11
  7. By: Jaeger, Carlo
    Abstract: Rich countries have developed a historically unprecedented capability to manage conventional risks - fire, floods, earthquakes etc., but also car accidents, many workplace risks, and more. It is based on two institutions - insurance markets and public risk governance - supported by a powerful theory: the expected utility approach to risk. Expected utility refines the utilitarian paradigm of rational action by combining the concept of utility functions with the concept of probability distributions, using subjective probabilities where required. One might think that future progress in risk research will consist mainly in refining this approach and spreading it to emerging and less developed countries. However, greater progress is necessary and possible. It is necessary because the global economy and technostructure we live in have generated new systemic risks - including financial crises, pandemics, climate change, nuclear war. These risks exceed the coping capacity of conventional risk management and call for new forms of integrated risk governance. Greater progress is possible because recent research has developed ways to address the basic difficulties of expected utility without loosing its valuable insights. They involve three major advances. First, to introduce a risk function that generalizes expected utility so as to overcome well-known difficulties like the Allais paradox. Second, to embed expected utility in a framework of iterated network games so as to take into account the social learning processes that are essential for real world risk governance. And third, to accommodate the logic of complementary descriptions called for by the new systemic risks of the 21st century. The coming breakthrough in risk research may best be achieved by bringing these advances to bear on practical efforts aiming at integrated risk governance.
    JEL: B41 C73 D80
    Date: 2015
  8. By: Pavel Krivenko (Stanford); Martin Schneider (Stanford University); Cosmin Ilut (Duke University)
    Abstract: In this paper we study models with heterogeneous ambiguity averse agents.
    Date: 2015
  9. By: Nina Anchugina
    Abstract: The main goal of this paper is to investigate which normative requirements, or axioms, lead to exponential and quasi-hyperbolic forms of discounting. Exponential discounting has a well-established axiomatic foundation originally developed by Koopmans (1960, 1972) and Koopmans et al. (1964) with subsequent contributions by several other authors, including Bleichrodt et al. (2008). The papers by Hayashi (2003) and Olea and Strzalecki (2014) axiomatize quasi-hyperbolic discounting. The main contribution of this paper is to provide an alternative foundation for exponential and quasi-hyperbolic discounting, with simple, transparent axioms and relatively straightforward proofs. Using techniques by Fishburn (1982) and Harvey (1986), we show that Anscombe and Aumann's (1963) version of Subjective Expected Utility theory can be readily adapted to axiomatize the aforementioned types of discounting, in both finite and infinite horizon settings.
    Date: 2015–11
  10. By: Falk, Armin (University of Bonn); Becker, Anke (University of Bonn); Dohmen, Thomas (University of Bonn); Enke, Benjamin (University of Bonn); Huffman, David B. (University of Pittsburgh); Sunde, Uwe (University of Munich)
    Abstract: This paper presents the Global Preference Survey, a globally representative dataset on risk and time preferences, positive and negative reciprocity, altruism, and trust. We collected these preference data as well as a rich set of covariates for 80,000 individuals, drawn as representative samples from 76 countries around the world, representing 90 percent of both the world's population and global income. The global distribution of preferences exhibits substantial variation across countries, which is partly systematic: certain preferences appear in combination, and follow distinct economic, institutional, and geographic patterns. The heterogeneity in preferences across individuals is even more pronounced and varies systematically with age, gender, and cognitive ability. Around the world, our preference measures are predictive of a wide range of individual-level behaviors including savings and schooling decisions, labor market and health choices, prosocial behaviors, and family structure. We also shed light on the cultural origins of preference variation around the globe using data on language structure.
    Keywords: economic preferences, cultural variation
    JEL: D01 D03 F00
    Date: 2015–11
  11. By: Saenz, Mariana (Georgia Southern University); Lewer, Joshua J. (Bradley University)
    Abstract: This article contributes to immigration literature by applying a Random Utility Maximization model to derive a migration gravity model that explains factors affecting migration outflows per administrative unit and region for the country of Colombia. Negative binomial cross-sectional estimates indicate that departments sharing an international border and overall labor market conditions are significance determinants of migration patterns for the departments, but non-economic factors such as credit constraints and cultural networks also affect migration outflows. Estimation of regional migration outflows are also provided and yield unique findings per geographic location.
    Keywords: emigration, Colombia, gravity model, negative binomial regression
    JEL: F22 C25 H11
    Date: 2015–11
  12. By: Nobuyuki Hanaki (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS); Nicolas Jacquemet (BETA - Bureau d'Economie Théorique et Appliquée - CNRS - Université de Strasbourg - UL - Université de Lorraine, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Stéphane Luchini (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université); Adam Zylbersztejn (GATE - Groupe d'analyse et de théorie économique - CNRS - UL2 - Université Lumière - Lyon 2 - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: How is one's cognitive ability related to the way one responds to strategic uncertainty? We address this question by conducting a set of experiments in simple 2 x 2 dominance solvable coordination games. Our experiments involve two main treatments: one in which two human subjects interact, and another in which one human subject interacts with a computer program whose behavior is known. By making the behavior of the computer perfectly predictable, the latter treatment eliminates strategic uncertainty. We find that subjects with higher cognitive ability are more sensitive to strategic uncertainty than those with lower cognitive ability.
    Keywords: Strategic Uncertainty, Bounded Rationality, Robot, Experiment
    Date: 2015
  13. By: Huang, Wei (Harvard University); Zhou, Yi (University of California, Berkeley)
    Abstract: Using plausibly exogenous variations in the ethnicity-specific assigned birth quotas and different fertility penalties across Chinese provinces over time, we provide new evidence for the transferable utility model by showing how China's One-Child Policy induced a significantly higher unmarried rate among the population and more interethnic marriages in China. We further develop the model and find that a policy-induced welfare loss originates from not only restricted fertility but also from marriage distortion, and both depend solely on the corresponding reduced-form elasticities. Our calculations suggest that the total welfare loss is around 4.9 percent of yearly household income, with marriage distortion contributing 17 percent of this welfare loss. These findings highlight the importance of taking into consideration the unintended behavioral responses to public policies and the corresponding social consequences.
    Keywords: One-Child Policy, marriage distortion, welfare loss
    JEL: H20 I31 J12 J13 J18
    Date: 2015–11
  14. By: Krah, Kwabena; Petrolia, Daniel; Williams, Angelica; Coble, Keith; Harri, Ardian; Rejesus, Roderick
    Abstract: This study employs a stated choice experiment to identify producer preferences for contracts to produce a risky bioenergy crop. The study develops a theoretical framework that takes into account subjective risk preference and perception information while also accounting for heterogeneous status-quo (i.e., current crop) alternatives. Results from our Random Parameter Logit model indicate that price, biorefinery harvest, and establishment cost-share all had significant positive effects on the probability of a producer accepting a contract, whereas contract length have a negative effect. The study also finds evidence of significant preference heterogeneity in producer preferences for biorefinery harvest, yield insurance, and contract length. Incorporating subjective risk perception and risk preference information, as well as accounting for heterogeneous status-quo alternatives in the decision framework improves overall model performance.
    Keywords: choice experiment, contract, mean-variance utility, preference heterogeneity, random parameters logit, risk perceptions, risk preferences, willingness to accept compensation, Crop Production/Industries, Environmental Economics and Policy, Resource /Energy Economics and Policy, Risk and Uncertainty, Q42, Q51,
    Date: 2015–11
  15. By: Masolo, Riccardo (Bank of England); Monti, Francesca (Bank of England)
    Abstract: We develop a model that can explain the evolution of trend inflation in the United States in the three decades before the Great Recession as a function of the reduction in uncertainty about the monetary policy maker’s behaviour. The model features ambiguity-averse agents and ambiguity regarding the conduct of monetary policy, but is otherwise standard. Trend inflation arises endogenously and has these determinants: the strength with which the central bank responds to inflation, the degree of uncertainty about monetary policy perceived by the private sector, and, if it exists, the inflation target. Given the importance of monetary policy for the determination of trend inflation, we also study optimal monetary policy in the case of lingering ambiguity.
    Keywords: Ambiguity aversion; monetary policy; trend inflation.
    JEL: D84 E31 E43 E52 E58
    Date: 2015–11–13

This nep-upt issue is ©2015 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.