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on Utility Models and Prospect Theory |
| By: | Ivanenko, Victor; Pasichnichenko, Illia |
| Abstract: | The world of random phenomena exceeds the domain of the classical probability theory. In the general case the description of randomness requires a specific set of probability distributions (which is called statistical regularity) rather than a singe distribution. Such statistical regularity arises as a limit of relative frequencies. This approach to randomness allows to generalize the expected utility theory in order to cover the decision problems under nonstochastic random events. Applying the von Neumann-Morgenstern utility theorem, we derive the maxmin expected utility representation for statistical regularities. The derivation is based on the axiom of the preference for stochastic risk, i.e. the decision maker wishes to reduce the set of probability distributions to a single one. |
| Keywords: | expected utility, risk, mass phenomena, statistical regularity, nonstochastic randomness, multiple prior |
| JEL: | C10 D81 |
| Date: | 2016–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70433&r=upt |
| By: | Arkady Konovalov (Department of Economics, Ohio State University); Ian Krajbich (Department of Economics, Ohio State University) |
| Abstract: | Revealed preference is the dominant approach for inferring preferences, but it relies on discrete, stochastic choices. The choice process also produces response times which are continuous and can often be observed in the absence of choice outcomes. Here, using three common choice tasks, we demonstrate that response times reflect strength-of-preference and can thus be used to recover individual utility functions and predict choices out of sample. Furthermore, we are able to use long response times to predict which choices are likely to later be reversed. These results provide a proof of concept for a novel "method of revealed indifference". |
| Keywords: | preferences, response times, sequential sampling models, drift diffusion model, experimental methodology, social preference, loss aversion, temporal discounting |
| JEL: | C91 D01 D03 D87 D81 D90 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:osu:osuewp:16-01&r=upt |
| By: | Mogens Fosgerau (Technical University of Denmark [Lyngby]); André De Palma (CES, ENS Cachan, CNRS, Universite Paris-Saclay, 94235 Cachan, France) |
| Abstract: | We formulate a family of direct utility functions for the consumption of a differentiated good. This family is based on a generalization of the Shan-non entropy. It includes dual representations of all additive random utility discrete choice models, as well as models in which goods are complements. Demand models for market shares can be estimated by plain regression, enabling the use of instrumental variables. Models for microdata can be estimated by maximum likelihood. |
| Keywords: | market shares,product differentiation,discrete choice,duality,generalized entropy , C25, L1 |
| Date: | 2016–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01291347&r=upt |
| By: | Jean-Michel Grandmont (ICEF, Department of Economics, University Ca' Foscari di Venezia at San Giobbe, Italy) |
| Abstract: | This work introduces a new mechanism that is able to generate procyclical comovements of aggregate labor productivity, employment and real wages, through endogenous variations of workers' effort, in a simple model involving structural unemployment, efficiency wages, financial market imperfections and expectations driven conditionally heteroskedastic sunspots business cycles, near a locally indeterminate steady state. Owing to imperfect effort monitoring, workers' effort level equates their disutility of effort to their expected utility gain of not shirking, in terms of their earned real income, and of the resulting anticipated random consumption. A positive current (consumption) sunspot shock generates a countercyclical uncertainty shock, i.e. a drecrease of the anticipated sunspot volatility, and makes risk averse workers more willing to provide "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, profit maximizing firms' choice of effciency wage contracts generates significant endogenous procyclical variations of effort and employment, in particular when the capital-efficient labor elasticity of substitution is smaller than 1. |
| Keywords: | Efficiency wages, Unemployment, Expectation driven business cycles, Conditionally heteroskedastic sunspots, Countercyclical uncertainty shocks, Prudence, Procyclical labor effort and productivity |
| JEL: | E00 E24 E32 J41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2016-14&r=upt |
| By: | Robert Kollmann |
| Abstract: | This paper analyzes the effects of output volatility shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country, two-good world with consumption home bias, 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, to compensate for the greater riskiness of the country’s output stream. This risk sharing transfer raises the country’s consumption, lowers its trade balance and appreciates its real exchange rate. In the recursive preferences framework here, volatility shocks account for a non-negligible 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 and the real exchange rate. |
| Keywords: | international business cycles; international risk sharing; external balance; exchange rate; volatility; consumption-real exchange rate anomaly |
| JEL: | F31 F32 F36 F41 F43 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/228794&r=upt |
| By: | Jose Apesteguia; Miguel Ángel Ballester |
| Abstract: | We propose a novel model of stochastic choice: the single-crossing random utility model (SCRUM). This is a random utility model in which the collection of utility functions satisfies the single-crossing property. We offer a characterization of SCRUMs based on three easy-to-check properties: Positivity, Monotonicity and Centrality. The identified collection of utility functions and associated probabilities is basically unique. We establish a stochastic monotone comparative result for the case of SCRUMs and study several generalizations of SCRUMs. |
| Keywords: | stochastic choice; single-crossing property; random utility models; monotone comparative statics |
| JEL: | D00 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:891&r=upt |
| By: | Michael Mania; Revaz Tevzadze |
| Abstract: | We study regularity properties of the dynamic value functions of primal and dual problems of optimal investing for utility functions defined on the whole real line. Relations between decomposition terms of value processes of primal and dual problems and between optimal solutions of basic and conditional utility maximization problems are established. These properties are used to show that the value function satisfies a corresponding backward stochastic partial differential equation. In the case of complete markets we give conditions on the utility function when this equation admits a solution. |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1604.00525&r=upt |
| By: | Freeman, David (Simon Fraser University); Manzini, Paola (University of St. Andrews); Mariotti, Marco (Queen Mary, University of London); Mittone, Luigi (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 procedure, auctions, multiple price list |
| JEL: | C91 D9 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9857&r=upt |
| By: | Rúben Meireles (Faculty of Economics, University of Porto); Pedro Campos (Faculty of Economics, University of Porto and LIAAD INESC TEC) |
| Abstract: | Faster internet connections are breaking most of the geographic barriers. At the same time, the huge digital content that have been generated in last years is motivating new forms of digital piracy. We know that piracy of copyrighted digital material has a huge impact on countries’ economy, being a major issue for the whole society and not only for content creators. The purpose of this paper is to investigate digital piracy intention. For that purpose, we have expanded the framework of the theory of planned behavior using the utility theory, the deterrence theory and other relevant constructs. Using data from students of a Portuguese university and high school, a sample of 590 questionnaires has been collected. Two models were developed and analyzed using structural equation modeling. The first considers the full sample (Full Model), while the second considers only those who had pirated (Pirate Model). The pirate model confirmed the existence of a significant and strong relation between past behavior and intention towards digital piracy. |
| Keywords: | Information and Internet Services; Computer Software, Digital Piracy, Theory of Planned Behavior, Deterrence Theory, Structural Equation Modeling |
| JEL: | L86 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:573&r=upt |
| By: | Giovanni Ferri (LUMSA University); Matteo Ploner (University of Trento); Matteo Rizzolli (LUMSA University) |
| Abstract: | Financial bubbles cause misallocation of resources and even systemic crises. Experimental finance has long tested both the determinant of financial bubbles’ formation and institutional designs meant at solving such bubbles. In line with this literature we explore whether the dual process theory proposed by Kahneman (2011) can explain bubbles’ formation. As compared with our benchmark FAST treatment, we deliberately slow down the decision making process in our SLOW treatment and thus we induce more System-2 type reasoning. We show that high volatility and extreme realizations are greatly reduced and average prices remain consistently aligned with the expected fundamental value once risk-aversion is considered. We also show that the main differences are driven by abnormal ask prices in the FAST treatment that are consistently withdrawn in the SLOW treatment. We also show that the SLOW condition clears out the hot-hand fallacy. We finally derive some tentative policy implications concerning slowing down finance. |
| Keywords: | Rational vs. emotional choice; Slow vs. fast trading; Dual process theory; System-1 and System-2; Speculative bubbles; Behavioral finance. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:lsa:wpaper:wpc07&r=upt |
| By: | Thureson, Disa (VTI) |
| Abstract: | Chetty (2006) developed a new method of estimating the Elasticity of Marginal Utility of Consumption (EMUC) from observed work time responses to wage changes and derived an upper bound of 2 for this parameter. Here I show that the omission of household production in Chetty’s model may lead to bias, and perform a numerical sensitivity analysis of Chetty’s results in this respect. I develop a new model that includes household production from which I derive new, unbiased EMUC formulas. I offer empirical estimates based on current evidence of the included parameters, suggesting a lower bound for EMUC of about 0.9. |
| Keywords: | Elasticity of marginal utility of consumption; Household production; Labor supply; Coefficient of relative risk aversion; Consumer behavior |
| JEL: | D10 D60 J22 |
| Date: | 2016–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2016_010&r=upt |
| By: | Parsons, Donald O. (George Washington University) |
| Abstract: | Unemployment insurance replacement rates world-wide are well below 100 percent, a fact often attributed to search moral hazard concerns. As Blanchard and Tirole (2008) have illustrated, however, neither search nor layoff moral hazard (firing cost) distortions need arise in first-best insurance plans. Their counterexample depends on the functional form of the state utility function--utility with a single argument, consumption plus monetized leisure. The monetized leisure model is unattractive if leisure is a choice variable, however, and a review of the optimal UI literature reveals a surprising variety of alternative utility function assumptions. A standard neoclassical utility function is used to characterize the utility function conditions required to generate moral-hazard-free (MHF) first-best contracts. Two conditions emerge: (i) the necessary condition that leisure and consumption be substitutes (the cross-derivative of consumption and leisure be negative) and (ii) the sufficient condition that leisure be an inferior good, Rosen (1985). Leisure appears to be a normal good, which rules out the possibility of first-best moral-hazard-free (FB MHF) utility structures, but the first-best UI replacement rate remains very much an open question. The rich empirical literature on the "retirement consumption paradox" suggests that the rate is below 100 percent, easing moral hazard concerns, if not eliminating them. |
| Keywords: | unemployment insurance, utility functions, moral hazard, firing costs, consumption, retirement |
| JEL: | J65 J41 J33 J08 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9824&r=upt |
| By: | Alexander Osharin (National Research University Higher School of Economics); Valery Verbus (National Research University Higher School of Economics) |
| Abstract: | The paper considers a two-country trade model of monopolistic competition featuring the heterogeneity of consumer preferences both within and across countries. The incorporation of heterogeneity into a traditional monopolistic competition setting is achieved by assuming different elasticities of substitution in the CES utility function for different consumers. The proposed setup expands on the traditional model of trade by demonstrating a richer set of country specific effects. The key question analysed in the paper is how consumer heterogeneity and trade liberalization affect markups and wages in different countries. Unlike the canonical CES-model of trade, where markups in different countries are constant and identical to each other, our model, by taking consumer heterogeneity into account, provides different markups across countries, incorporating both heterogeneity and trade specifics. The model also predicts that the larger of two countries engaged in costly trade may have a wage rate higher than, lower than or equal to that of the smaller one, depending on the general equilibrium conditions. This finding is in contrast to that of the canonical setting, where the larger country under costly trade always has a higher wage rate. |
| Keywords: | heterogeneous consumers; monopolistic competition; CES utility function; international trade, markups, wages |
| JEL: | F12 D43 L13 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:131/ec/2016&r=upt |
| By: | Ahlheim, Michael; Neidhardt, Jan |
| Abstract: | This paper addresses a methodological problem of choice experiments, namely the problem that respondents sometimes avoid the intellectual effort of thoroughly considering the trade-offs between different alternatives that are the essence of every choice experiment, and tick instead the next best alternative without the necessary deliberation. This kind of behaviour which is called "nontrading" in the respective literature calls into question the validity of choice experiments. In this paper, which is based on an online choice experiment concerned with consumer's tastes for table grapes with 1,000 participants, we suggest possibilities to identify potential non-traders not only by their answering behaviour but also by some general characteristics we found to be typical of this kind of respondent. |
| Keywords: | Non-Trading Behaviour,Discrete Choice Experiment,Table Grapes |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hohdps:012016&r=upt |
| By: | Robert Kollmann; Stefan Zeugner |
| Abstract: | This note corrects Blanchard and Kahn’s (1980) solution for a linear dynamic rational expectations model with one state variable and one control variable. |
| JEL: | C00 C60 E30 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/228886&r=upt |
| By: | Paola Manzini (University of St. Andrews and IZA); Marco Mariotti (Queen Mary University of London); Christopher J. Tyson (Queen Mary University of London) |
| Abstract: | In the context of the two-stage threshold model of decision making, with the agent's choices determined by the interaction of three "structural variables," we study the restrictions on behavior that arise when one or more variables are exogenously known. Our results supply necessary and sufficient conditions for consistency with the model for all possible states of partial knowledge, and for both single- and multi-valued choice functions. |
| Keywords: | Attention, Revealed preference, Salience, Satisficing |
| JEL: | D01 D03 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp790&r=upt |