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on Utility Models and Prospect Theory |
| By: | Jose Apesteguia; Miguel Angel Ballester |
| Abstract: | Suppose that, when evaluating two alternatives x and y by means of a parametric utility function, low values of the parameter indicate a preference for x and high values indicate a preference for y. We say that a stochastic choice model is monotone whenever the probability of choosing x is decreasing in the preference parameter. We show that the standard use of random utility models in the context of risk and time preferences may sharply violate this monotonicity property, and argue that their use in preference estimation may be problematic. In particular, they may pose identication problems and yield biased estimations. We then establish that the alternative random parameter models, in contrast, are always monotone. We show in an empirical application that standard risk-aversion assessments may be severely biased. |
| Keywords: | stochastic choice, preference parameters, random utility models, random parameter models, Risk Aversion, delay aversion |
| JEL: | C25 D81 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:859&r=upt |
| By: | Georgios Gerasimou (University of St Andrews) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1511&r=upt |
| 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: | D80 G10 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1087&r=upt |
| By: | David Freeman (Simon Fraser University); Paola Manzini (University of St Andrews and IZA); Marco Mariotti (Queen Mary University of London); Luigi Mittone (University of Trento) |
| Abstract: | We study three procedures to elicit attitudes towards delayed payments: the Becker-DeGroot-Marschak procedure; the second price auction; and the multiple price list. The payment mechanisms associated with these methods are widely considered as incentive compatible, thus if preferences satisfy Procedure Invariance, which is also widely (and often implicitly) assumed, they should yield identical time preference distributions. We find instead that the monetary discount rates elicited using the Becker-DeGroot-Marschak procedure are significantly lower than those elicited with a multiple price list. We show that the behavior we observe is consistent with an existing psychological explanation of preference reversals. |
| Keywords: | time preferences, elicitation methods, Becker-DeGroot-Marschak pro- cedure, auctions, multiple price list |
| JEL: | C91 D9 |
| Date: | 2015–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1513&r=upt |
| By: | Yılmaz, Engin; Süslü, Bora |
| Abstract: | As the basis of the current economic approach, comes to the fore the intertemporal utility function of decision-making economic units. Decision-making economic units decide their expenditures upon the substitution of their future utility for present utility. They defer present consumption and head for making savings. Yet, the exact opposite may also apply. Changes in the policy decisions of monetary authority have impacts on the intertemporal utility maximization of economic units as well. In this study, the question whether the amount or the price of the money affects the aggregate demand in Turkish economy was examined within the framework of dynamic optimization. The results showed that in Turkish economy where nominal income expectations are high, the resource and loan creation would increase and that when the central bank increase the interest rates to hinder this process, consumption would head up even more. |
| Keywords: | New Neo Classical Synthesis, Consumption, Monetary Policy |
| JEL: | E51 E52 E58 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68614&r=upt |
| By: | Gokan, Toshitaka |
| Abstract: | This paper proposes a general equilibrium model of a monocentric city based on Fujita and Krugman (1995). Two rates of transport costs per distance and for the same good are introduced. The model assumes that lower transport costs are available at a few points on a line. These lower costs represent new transport facilities, such as high-speed motorways and railways. Findings is that new transport facilities connecting the city and hinterlands strengthen the lock-in effects, which describes whether a city remains where it is forever after being created. Furthermore, the effect intensifies with better agricultural technologies and a larger population in the economy. The relationship between indirect utility and population size has an inverted U-shape, even if new transport facilities are used. However, the population size that maximizes indirect utility is smaller than that found in Fujita and Krugman (1995). |
| Keywords: | Econometric model, Transportation, Urban societies, Urban system, Monopolistic competition, Transport facilities |
| JEL: | F12 O14 R12 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper548&r=upt |
| By: | Dylan Minor (Harvard Business School, Strategy Unit) |
| Abstract: | When seeking new leaders, business and government organizations alike often need individuals that are less risk averse, or even risk-seeking, in order to improve performance. However, individuals amenable to increased risk-taking may be more likely to engage in misconduct. To study this issue, we explore US political scandals and the implicated politicians' portfolio choices. We find that a politician allocating all of her portfolio to risky investments has double the odds of being involved in a political sandal compared to a politician allocating all of her portfolio to safe investments. This suggests that those who are more willing to take risks in their personal finances are also more likely to engage in misconduct. We validate portfolio choice as a measure of risk preferences by correlating actual high-stakes investment choices (average $700,000 US) to conventional laboratory lottery choices (average $51 US) of wealthy investors. |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:16-073&r=upt |
| By: | Fabrizio Germano (Universitat Pompeu Fabra and Barcelona Graduate School of Economics); Peio Zuazo-Garin (Universitat Rovira i Virgili, Department d’Economia, CREIP and BRiDGE) |
| Abstract: | We study an interactive framework that explicitly allows for nonrational behavior. We do not place any restrictions on how players’ behavior deviates from rationality. Instead we assume that there exists a probability p such that all players play rationally with at least probability p, and all players believe, with at least probability p, that their opponents play rationally. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary probability p. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to derive a measure p that bounds from below the probability with which any given player chooses actions consistent with payoff maximization and common knowledge of payoff maximization. |
| Keywords: | strategic interaction, correlated equilibrium, robustness to bounded rationality, approximate knowledge, incomplete information, measure of rationality, experiments |
| JEL: | C72 D82 D83 |
| Date: | 2015–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1551&r=upt |
| By: | Muriel Fadairo (Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France); Cyntia Lanchimba (National Polytechnic School, Quito, Ecuador; Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France); Miguel Yangari (National Polytechnic School, Quito, Ecuador) |
| Abstract: | Existing literature on franchising has extensively studied the presence of plural form distribution networks, where two types of vertical relationships - integration versus franchising - co-exist. However, despite the importance of monetary provisions in franchise contracts, their definition in the case of plural form networks had not been addressed. In this paper, we focus more precisely on the “share parameters” in integrated (company-owned retail outlet) and decentralized (franchised outlet) vertical contracts, respectively the commission rate and the royalty rate. We develop an agency model of payment mechanism in a two-sided moral hazard context, with one principal and two heterogenous agents distinguished by different levels of risk aversion. We define the optimal monetary provisions, and demonstrate that even in the case of segmented markets, with no correlation between demand shocks, the two rates (commission rate, royalty rate) are negatively interrelated. |
| Keywords: | Franchising, dual distribution, royalty rate, commission rate, moral hazard |
| JEL: | L14 D82 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1602&r=upt |
| By: | Koji Shirai (School of Economics, Kwansei Gakuin University) |
| Abstract: | We develop revealed preference characterizations of (1) monotone choice in the context of individual decision making and (2) strategic complementarity in the context of simultaneous games. We first consider the case where the observer has access to panel data and then extend the analysis to the case where data sets are cross sectional and preferences heterogenous. Lastly, we apply our techniques to investigate the possibility of spousal influence in smoking decisions. |
| Keywords: | monotone comparative statics, single crossing di↵erences, interval dominance, supermodular games, lattices |
| JEL: | C6 C7 D7 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:138&r=upt |
| By: | Adrian Bruhin (University of Lausanne); Ernst Fehr (University of Zurich); Daniel Schunk (Johannes Gutenberg University of Mainz) |
| Abstract: | There is vast heterogeneity in the human willingness to weigh others’ interests in decision making. This heterogeneity concerns the motivational intricacies as well as the strength of other-regarding behaviors, and raises the question how one can parsimoniously model and characterize heterogeneity across several dimensions of social preferences while still being able to predict behavior over time and across situations. We tackle this task with an experiment and a structural model of preferences that allows us to simultaneously estimate outcome-based and reciprocity-based social preferences. We find that non-selfish preferences are the rule rather than the exception. Neither at the level of the representative agent nor when we allow for several preference types do purely selfish types emerge. Instead, three temporally stable and qualitatively different other-regarding types emerge endogenously, i.e., without pre-specifying assumptions about the characteristics of types. When ahead, all three types value others’ payoffs significantly more than when behind. The first type, which we denote as strongly altruistic type, is characterized by a relatively large weight on others’ payoffs – even when behind – and moderate levels of reciprocity. The second type, denoted as moderately altruistic type, also puts positive weight on others’ payoff, yet at a considerable lower level, and displays no positive reciprocity while the third type is behindness averse, i.e., puts a large negative weight on others’ payoffs when behind and behaves selfishly otherwise. We also find that there is an unambiguous and temporally stable assignment of individuals to types. Moreover, the three-type model substantially improves the (out-of-sample) predictions of individuals’ behavior across additional games while the information contained in subject-specific parameter estimates leads to no or only minor additional predictive power. This suggests that a parsimonious model with three types captures the bulk of the predictive power contained in the preference estimates. |
| Keywords: | Social Preferences, Heterogeneity, Stability, Finite Mixture Models |
| JEL: | C49 C91 D03 |
| Date: | 2016–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:1523&r=upt |
| By: | Verity Watson, Matt Sutton, Chris Dibben and Mandy Ryan |
| Abstract: | In this paper we illustrate the use of a stated preference method, discrete choice experiments, to derive domain weights for the IMD. To do this, respondents were asked to make a series of choices between two deprivation states. To ensure the realism of, and respondents’ engagement with, the task, we refer to each state as a hypothetical person’s circumstances. In each choice, we ask respondents to state which person needs the most additional support from the government. We show that respondents place greater weight on housing and health, and less weight on employment, than the existing IMD. Creation-Date: 2008-08 |
| URL: | http://d.repec.org/n?u=RePEc:qeh:ophiwp:ophiwp024&r=upt |
| By: | Marc Fleurbaey |
| Abstract: | This paper describes the evaluation of individual situations in terms of equivalent incomes computed from ordinary income by adding or subtracting various terms of willingness-to-pay. It discusses the origin of the approach and its connection with social choice theory and philosophical principles. It also examines the challenges to be addressed for empirical applications of the approach. Creation-Date: 2008-08 |
| URL: | http://d.repec.org/n?u=RePEc:qeh:ophiwp:ophiwp025&r=upt |
| By: | Franz Dietrich (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Christian List (LSE - London School of Economics) |
| Abstract: | We introduce a "reason-based" framework for explaining and predicting individual choices. The key idea is that a decision-maker focuses on some but not all properties of the options and chooses an option whose "motivationally salient" properties he/she most prefers. Reason-based explanations can capture two kinds of context-dependent choice: (i) the motivationally salient properties may vary across choice contexts, and (ii) they may include "context-related" properties, not just "intrinsic" properties of the options. Our framework allows us to explain boundedly rational and sophisticated choice behaviour. Since properties can be recombined in new ways, it also offers resources for predicting choices in unobserved contexts. |
| Keywords: | Rational choice,reasons,context-dependence,bounded and sophisticated rationality,prediction of choice |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01249514&r=upt |
| By: | Halevy, Yoram; Persitz, Dotan; Zrill, Lanny |
| Abstract: | Given a data set of choices from linear budget sets, Varian (1982) uses revealed preference theory to construct non-parametric bounds on the indifference curve that passes through a given bundle. We claim that these bounds do not apply to non-convex preferences, and therefore may lead to erroneous welfare analysis. |
| Keywords: | Revealed Preferences, Generalized Axiom of Revealed Preference, Partial Identification. |
| JEL: | D11 D12 C91 |
| Date: | 2015–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:yoram_halevy-2015-23&r=upt |