nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2015‒12‒08
thirteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. A Characterization of Risk-Neutral and Ambiguity-Averse Behavior By Gerasimou, Georgios
  2. Ambiguity and portfolio decisions By Eduardo Corso
  3. A Meta-analysis of the Risk Aversion Coefficients of Natural Resource Managers Evaluated by Stated Preference Methods By Marielle Brunette; Johanna Choumert; Stéphane Couture; Claire Montagne-Huck
  4. The Double-Channeled Effects of Experience on Individual Investment Decisions: Experimental Evidence By Peiran Jiao
  5. The identication of beliefs from asset demand By Kubler, Felix; Polemarchakis, Herakles
  6. Decision making in times of uncertainty: An info-gap perspective By Yakov Ben-Haim; Maria Demertzis
  7. Reference Points and Learning By Alan Beggs
  8. Non-Keynesian Savings of Russians By Dmitrii Timofeev
  9. Utility-Based Smartphone Energy Consumption Optimization for Cloud-Based and On-Device Application Uses By Baseem Al-athwari; Jorn Altmann
  10. Consumption Uncertainty and Precautionary Saving By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
  11. Structural Analysis of Value Creation in Software Service Platforms By Netsanet Haile; Jorn Altmann
  12. About the Categorization of Latent Variables in Hybrid Choice Models By Francisco J. Bahamonde-Birke; Juan de Dios Ortúzar
  13. Intergenerational Mobility, Human Capital Composition and Distance to Technological Frontier By Sujata Basu

  1. By: Gerasimou, Georgios
    Abstract: This paper studies a decision maker who chooses monetary bets/investment portfolios under pure uncertainty. Necessary and sufficient conditions on his preferences over these objects are provided for his choice behavior to be guided by the *maxmin expected value* rule, and therefore to exhibit both ``risk neutrality'' and ambiguity aversion. This result is obtained as an extension of a simple re-characterization of de Finetti's theorem on maximization of subjective expected value.
    Keywords: Maxmin expected value; ambiguity aversion; risk neutrality; multiple priors; de Finetti.
    JEL: D01 D03 D11
    Date: 2015–12–01
  2. By: Eduardo Corso (Central Bank of Argentina)
    Abstract: We study the household portfolio allocation in an economy with a history of nominal and macro volatility. First, applying smooth ambiguity preferences to a static portfolio choice problem, we rationalize two facts about the Argentine experience of the last 20 years: the dollarization of household financial assets and its bias towards investment real estate as a means of preserving the real value of wealth. We find that ambiguity explains portfolio dollarization. In addition, ambiguity aversion reduces the demand for assets denominated in US dollars and increases the demand for investment real estate. Second, applying recursive smooth ambiguity preferences to a consumption-based model, we find that ambiguity and ambiguity aversion may be relevant factors behind the equilibrium returns of low relative risk assets in Argentina. In addition, ambiguity and ambiguity aversion may be relevant factors explaining equity premiums.
    Keywords: ambiguity, ambiguity aversion, dollarization, real state investment, reserve value
    JEL: G10 G11 D14
    Date: 2015–11
  3. By: Marielle Brunette (Laboratoire d'Economie Forestière, INRA - AgroParisTech); Johanna Choumert (i) Economic Development Initiatives (E.D.I.), P.O. Box 393, Bukoba, Kagera region, Tanzania (ii) Centre d'Études et de Recherches sur le Développement International (CERDI), Université d'Auvergne.); Stéphane Couture (INRA, UR 875 Applied Mathematics and Computer Science laboratory); Claire Montagne-Huck (Laboratoire d'Economie Forestière, INRA - AgroParisTech)
    Abstract: Although they have been widely studied, the attitudes of natural resource managers towards risk remain a common research topic through stated preference methods. The relationship between the risk aversion coefficients of natural resource managers, their characteristics, and the different studies has still not been elucidated. Using 63 studies, we shed light on why the partial, absolute and relative estimated risk aversion coefficients of natural resource managers differ. We investigated, through a meta-regression, the incidence of choices made by authors (elicitation method, measure of risk aversion coefficient, payoff choice) and characteristics of the natural resource managers (geographical location, type of activities) on the estimated risk aversion coefficients. Our results show that the model for the relative risk aversion coefficient has a stronger explanatory power than those for partial and absolute coefficients. The three coefficients are mainly explained by the type of publication, the elicitation procedure and the type of activities. However, the level of economic development of the country and the type of payoff (i.e., hypothetical or real) seem to have no impact whatsoever on the estimated coefficient. We also provide ranges for each type of risk aversion coefficient – absolute, partial and relative.
    Keywords: Risk preferences, expected utility theory, stated-preference methods, metaanalysis, meta-regression, natural resources.
    JEL: C9 C12 D81 Q12
    Date: 2015
  4. By: Peiran Jiao
    Abstract: Abstract: Investors in the financial markets typically have access to both descriptive information of assets, from brochures, financial analysts, reports, etc., and own experience.However, little is known about the role of experience in investment decisions. This paper investigates this issue by experimentally testing the effects of experience in aninvestment task with choice feedback and varying levels of descriptive information. We document the double-channeled effects of experience: when elicited beliefs were controlledfor, participants significantly relied on experience regardless of the descriptions, behaving consistently with the law of effect; additionally, beliefs were also distorted by experience, in that participants were more optimistic about assets from which they gained, and pessimistic about previously unowned assets. In a calibration exercise, reinforcement learning significantly added predictive power to expected utility models.
    Keywords: Description, Experience, Investment Decision, Belief Distortion.
    JEL: C91 D03 D83 G11
    Date: 2015–11–18
  5. By: Kubler, Felix (IBF, University of Zurich and Swiss Finance Institute); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: The demand for assets as prices and initial wealth vary identifies beliefs and attitudes towards risk. We derive conditions that guarantee identification with no knowledge either of the cardinal utility index or of the distribution of future endowments or payoffs of assets ; the argument applies even if the asset market is incomplete and demand is observed only locally.
    Keywords: asset prices ; beliefs ; attitudes towards risk JEL Classification Numbers: D80 ; G10
    Date: 2015
  6. By: Yakov Ben-Haim; Maria Demertzis
    Abstract: The distinction of risk vs uncertainty as made by Knight has important implications for policy selection. Assuming the former when the latter is relevant can lead to wrong decisions. With the aid of a stylized model that describes a bank's decision on how to allocate loans, we discuss decision making under Knightian uncertainty. We use the info-gap robust satisficing approach to derive a trade-off between confidence and performance (somewhat analogous to confidence intervals in the Bayesian approach but without assignment of probabilities). We then contrast how decisions change when following this approach by comparison to the other main non-probabilistic approach available in the literature, namely min-max.
    Keywords: Uncertainty vs risk; confidence; robustness; satisficing; info-gap
    JEL: C11 D81 G10
    Date: 2015–11
  7. By: Alan Beggs
    Abstract: Abstract This paper studies learning when agents evaluate outcomes in comparison to a reference point. It shows that certain models of reinforcement learning lead toclasses of recursive preferences.
    Keywords: Reference points, Reinforcement Learning, Recursive Preferences
    JEL: D83 D87
    Date: 2015–11–20
  8. By: Dmitrii Timofeev (National Research University Higher School)
    Abstract: The Russian recession of 2014-2015 began with a run on the ruble and a rise in the rate of inflation, the precise opposite of a Western-type deflationary slump combined with money hoarding. Does this mean that Russians need different micro-model to describe savings and consumption behavior? This study shows that the workhorse log-linearized rational SDF formula with the CRRA utility function still provides a good explanation for the behavior of Russian consumers. It explains dollarization, domestic equity market avoidance, preference for real estate, and, most importantly, a wary attitude towards the ruble. Expectations derived from past and interactive preferences lock the Russian economy in a state of steadfast distrust in the ruble as prone to inflation. At present, one should not expect a Keynesian-type deflationary cycle in Russia. The next recession is likely to be inflationary, requiring monetary tightening. This reasoning is generalized for other emerging countries. A free-floating currency and inflation targeting do not ensure an easy path for countries with recent experiences of high inflation
    Keywords: savings, monetary policy, business cycle, recession, Russia, Euler equation, CCAPM, stochastic discount factor
    JEL: G11 G18 P24 E31 D91
    Date: 2015
  9. By: Baseem Al-athwari (TEMEP, College of Engineering, Seoul National University); Jorn Altmann (TEMEP, College of Engineering, Seoul National University)
    Abstract: As the use of smartphones and its applications continue their rapid growth, prolonging the smartphone battery lifetime has become one of the main concerns for smartphone users if re-charging is not possible. In this paper, we show that, by taking into account the user preferences, the energy consumption of smartphones can be adjusted to maximize the user utility. The user preferences are reflected through the type of application uses, the perceived costs of energy allocation for the different types of applications, and the perceived value of energy remaining in the battery of the smartphone. In particular, we optimize the energy consumption of smartphones through the use of a utility-based energy consumption optimization model, which we developed. We demonstrate the workings of our model by applying it to a simple scenario, in which we vary the perceived value of energy remaining in the smartphone battery and the user’s perceived costs for energy consumed by the two types of application uses: cloud-based application uses and on-device application uses. Our results show that, by letting users express their preferences, users can allocate the remaining smartphone energy such that it maximizes their utilities.
    Keywords: Smartphones, Apps, Energy Consumption Optimization, Utility Function, Usage Behavior, Cloud Computing, Off-Loading, Application Alassification, Energy Allocation.
    JEL: C13 C61 D01 D11 L82 L86 M15
    Date: 2015–11
  10. By: Dimitris Christelis (University of Naples Federico II, CSEF, CFS, CEPAR and Netspar); Dimitris Georgarakos (Deutsche Bundesbank, CFS and University of Leicester); Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Maarten van Rooij (De Nederlandsche Bank and Netspar)
    Abstract: Using survey data from a representative sample of Dutch households, we estimate the strength of the precautionary saving motive by eliciting subjective expectations on future consumption. We find that expected consumption risk is higher for the young and the self-employed, and is correlated positively with income risk. We insert these subjective expectations (rather than consumption realizations, as in the existing literature) in a Euler equation for consumption, and estimate the degree of prudence by associating expected consumption risk with expected consumption growth. Robust OLS and IV estimates both indicate a coefficient of relative prudence of around 2.
    Keywords: Consumption Risk, Euler Equation, Prudence, Precautionary Saving, Subjective Expectations.
    JEL: D12 D14 D81 E21 C14
    Date: 2015–11–05
  11. By: Netsanet Haile (College of Engineering, Seoul National University); Jorn Altmann (College of Engineering, Seoul National University)
    Abstract: As software service platforms grow in number of users and variety of service offerings, it raises the question of how this phenomenon impacts the value obtained by users. This paper identifies system usability, service variety, and personal connectivity to be the major determinants that contribute to the value offered to users on mobile software service platforms. A structural equation model, which is based on utility theory, technology acceptance theory, and the theory of network externalities, has been constructed from seven observed constructs, reflecting the three determinants and the user value. The lower bound of user value is estimated through the user’s willingness-to-pay for services and the user’s willingness to spend time on using services. For the validation, a co-variance-based structural equation analysis has been conducted on online survey data of 210 users of mobile service platforms (e.g., Android, iOS). The results show that the number of services used and the number of active user connections were found to be the strongest constructs explaining user value. Perceived usefulness did not explain user value as much. In total, they can explain 49% of the value that the user receives from the platform. The implication of this result is that users’ value from a software service platform cannot be explained by the technology acceptance model itself. Instead, an approach that as used in this research of integrating network externality theory, utility theory, and technology acceptance theory is necessary.
    Keywords: Software Ecosystem, Network Effects, TAM, Utility Theory, Value Creation, Mobile Software Service Platforms.
    JEL: C13 C42 C51 C88 D46 L86 M15 M21 O32
    Date: 2015–11
  12. By: Francisco J. Bahamonde-Birke; Juan de Dios Ortúzar
    Abstract: Although hybrid choice models are fairly popular nowadays, the way in which different types of latent variables are considered into the utility function has not been extensively analysed. Latent variables accounting for attitudes resemble socioeconomic characteristics and, therefore, systematic taste variations and categorizations of the latent variables should be considered. Nevertheless, categorizing a latent variable is not an easy subject, as these variables are not observed and consequently exhibit an intrinsic variability. Under these circumstances it is not possibly to assign an individual to a specific group, but only to establish a probability with which an individual should be categorized in given way. In this paper we explore different ways to categorize individuals based on latent characteristics, focusing on the categorization of latent variables. This approach exhibits as main advantage (over latent-classes for instance) a clear interpretation of the function utilized in the categorization process, as well as taking exogenous information into account. Unfortunately, technical issues (associated with the estimation technique via simulation) arise when attempting a direct categorization. We propose an alternative to attempt a direct categorization of latent variables (based on an auxiliary variable) and conduct a theoretical and empirical analysis (two case studies), contrasting this alternative with other approaches (latent variable-latent class approach and latent classes with perceptual indicators approach). Based on this analysis, we conclude that the direct categorization is the superior approach, as it offers a consistent treatment of the error term, in accordance with underlying theories, and a better goodness-of-fit.
    Keywords: hybrid choice models, latent variables, latent classes, categorization
    JEL: C35 C50
    Date: 2015
  13. By: Sujata Basu (Centre for International Trade and Development,Jawaharlal Nehru University)
    Abstract: An endogenous skilled biased growth model has been considered to show that along the growth path wage gap widened and both upward and downward mobility fall. This implies that education becomes more correlated with initial conditions and less related with the cognitive ability. Growth occurs through the twin channels of technology - imitating from the world technology frontier and innovating on its own technology level - innovation being more skilled-intensive than imitation. An imperfect capital market has been considered where individual's education decision depends on the cognitive ability as well as on the parental income. Moreover, it is shown that growth enhancing education policy leads to absolute convergence of all the economies to the world technology frontier. In the imitation-innovation regime, life time utility gap within skilled as well as unskilled human capital rise due to parental income differences. Furthermore, life time utility gap within skilled human capital rises due to cognitive ability differences.

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.