nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2016‒07‒02
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Choice - Based Cardinal Utility. A Tribute to Patrick Suppes By Mongin , Philippe; Baccelli , Jean
  2. Social preference under twofold uncertainty By Mongin, Philippe; Pivato, Marcus
  3. Under Uncertainty, Over Time and Regarding Other People: Rationality in 3D By Dorian Jullien
  4. Certainty Preference, Random Choice, and Loss Aversion: A Comment on "Violence and Risk Preference: Experimental Evidence from Afghanistan" By Ferdinand Vieider
  5. A Rational Economic Model of Paygo Tax Rates By Sheshinski, Eytan; Murtin, Fabrice; de Menil, Georges; T. Yokossi, Murtin
  6. Optimal Deterrence of Cooperation By Stéphane Gonzalez; Aymeric Lardon
  7. Uncertainty, Ambiguity and implications for Coal Seam Gas development: An experimental investigation By Ancev, Tiho; Taylor, Eloise; Merrett, Danielle
  8. Homophily and transitivity in dynamic network formation By Bryan S. Graham
  9. Strategy-proof choice of acts: a preliminary study By SPRUMONT, Yves
  10. The Utilitarian Relevance of the Aggregation Theorem By Mongin, Philippe; Fleurbaey, Marc
  11. (Belief in) life after death impacts the utility of life before it - a difference in preferences or an artefact? By Michal Jakubczyk; Dominik Golicki; Maciej Niewada

  1. By: Mongin , Philippe; Baccelli , Jean
    Abstract: We reexamine some of the classic problems connected with the use of cardinal utility functions in decision theory, and discuss Patrick Suppes's contributions to this field in light of a reinterpretation we propose for these problems. We analytically decompose the doctrine of ordinalism, which only accepts ordinal utility functions, and distinguish between several doctrines of cardinalism, depending on what components of ordinalism they specifically reject. We identify Suppes's doctrine with the major deviation from ordinalism that conceives of utility functions as representing preference differences, while being nonetheless empirically related to choices. We highlight the originality, promises and limits of this choice-based cardinalism.
    Keywords: Ordinal utility; Cardinal utility; Preference differences; Representation theorems; Suppes; Ordinalism; Cardinalism
    JEL: B21 B31
    Date: 2016–01–04
  2. By: Mongin, Philippe; Pivato, Marcus
    Abstract: We investigate the conflict between the ex ante and ex post criteria of social welfare in a novel axiomatic framework of individual and social decisions, which distinguishes between a subjective and an objective source of uncertainty. This framework permits us to endow the individuals and society not only with ex ante and ex post preferences, as is classically done, but also with interim preferences of two kinds, and correspondingly, to introduce interim forms of the Pareto principle. After characterizing the ex ante and ex post criteria, we present a first solution to their conflict that amounts to extending the former as much possible in the direction of the latter. Then, we present a second solution, which goes in the opposite direction, and is our preferred one. This solution combines the ex post criterion with an objective interim Pareto principle, which avoids the pitfalls of the ex ante Pareto principle, and especially the problem of "spurious unanimity" discussed in the literature. Both solutions translate the assumed Pareto conditions into weighted additive utility representations, and both attribute common individual probability values only to the objective source of uncertainty.
    Keywords: Ex ante social welfare; ex post social welfare; objective versus subjective uncertainty; Pareto principle; separability; Harsanyi social aggregation theorem; spurious unanimity.
    JEL: D70 D81
    Date: 2016–06–05
  3. By: Dorian Jullien (University of Nice Sophia Antipolis; GREDEG CNRS)
    Abstract: This paper scrutinizes behavioral economics' challenges to the standard accounts of economic behaviors within and across three dimensions: under uncertainty, over time and regarding other people. ‘Within' dimensions means that decision problems are of the form, e.g., ‘a consequence for sure vs. a bigger consequence with uncertainty' or ‘a consequence now vs. a bigger consequence later', by contrast with decision problems that cut ‘across' dimensions as in, e.g., ‘a consequence for sure but later vs. another consequence now but with uncertainty'. The proposed distinction between challenges within and across dimensions is more than conceptual, it also delimits a historical rupture between two periods that are nontrivial regarding the debates between behavioral and standard economics. The classical challenges posed by Kahneman, Tversky, Thaler and others focused on interactions within dimensions, posing problems to standard models. The more recent challenges from interactions across dimensions are posing problems to to both standard and behavioral economists' models. This paper proposes a systematic contrasts between the three dimensions, in both the challenges within and across the three dimensions, i.e., it proposes to ‘see rationality in 3D', in order to further our understanding of the contemporary theoretical, empirical and methodological stakes underlying these debates. Three methodological issues are discussed throughout: one that is not discussed elsewhere in the reflexive literature, namely the role of language in economic rationality, which we try to connect with the two classical ones around behavioral economics, namely, the issue of interdisciplinary between economics and psychology and the positive/normative issue within models of individual behaviors. With respect to the latter, we suggest that there is a slow historical shift from a primacy of risk over time over social preferences in the making of economists' value judgments of rationality and irrationality, to a competing primacy of time over risk over social preferences.
    Keywords: behavioral economics, economic rationality, expected utility, prospect theory, exponential discounting, hyperbolic discounting, self-interest, other-regarding behaviors, economic methodology, history of economics
    JEL: A12 B21 B41 D01 D03 D81 D90 D64
    Date: 2016–06
  4. By: Ferdinand Vieider (Department of Economics, University of Reading)
    Abstract: I revisit recent evidence uncovering a preference for certainty in violation of dominant normative and descriptive theories of decision making under risk. I explore two alternative explanations of the preference patterns found: i) systematic noise; and ii) reference dependence activated by salient outcomes. I develop choice lists that allow to disentangle these different explanations, and test them on rural subjects in southern India. The results reject explanations based on a preference for certainty in favor of explanations based on random choice. The estimates are further distorted by response mode effects, with loss aversion leading to an over-estimation of risk aversion.
    Keywords: risk preferences, certainty effect, random choice, loss aversion
    JEL: C91 D12 D81 O12
    Date: 2016–05–31
  5. By: Sheshinski, Eytan; Murtin, Fabrice; de Menil, Georges; T. Yokossi, Murtin
    Abstract: We argue that paygo rates are determined by a representative agent and a benevolent government jointly maximizing the expected life-time utility of the agent. The distributions of labor and capital income are calculated from national data on real GDP, real wages and the real return to capital since 1950. With uniform risk aversion, predicted rates explain 83% of the variance of observed rates. The globalization of capital markets would lead to convergence of paygo rates. Our results are immune to crises like 2008.
    Keywords: Paygo, Savings, Risk Aversion, OLG, National Capital Markets
    JEL: H0
    Date: 2016–05
  6. By: Stéphane Gonzalez (Univ Lyon, UJM Saint-Etienne, France; GATE L-SE CNRS UMR 5824); Aymeric Lardon (University of Nice Sophia Antipolis, France; GREDEG CNRS)
    Abstract: We introduce axiomatically a new solution concept for cooperative games with transferable utility inspired by the core. While core solution concepts have investigated the sustainability of cooperation among players, our solution concept, called contraction core, focuses on the deterrence of cooperation. The main interest of the contraction core is to provide a monetary measure of the robustness of cooperation into the grand coalition. We motivate this concept by providing optimal fine imposed by competition authorities for the dismantling of cartels in oligopolistic markets. We characterize the contraction core on the set of balanced cooperative games with transferable utility by four axioms: the two classic axioms of non-emptiness and individual rationality, a superadditivity principle and a new axiom of consistency.
    Keywords: TU-game, contraction core, optimal fine, Cournot oligopoly, axiomatization
    JEL: C71 D43
    Date: 2016–06
  7. By: Ancev, Tiho; Taylor, Eloise; Merrett, Danielle
    Keywords: Risk and Uncertainty,
    Date: 2016–02
  8. By: Bryan S. Graham (Institute for Fiscal Studies and University of California, Berkeley)
    Abstract: In social and economic networks linked agents often share additional links in common. There are two competing explanations for this phenomenon. First, agents may have a structural taste for transitive links – the returns to linking may be higher if two agents share links in common. Second, agents may assortatively match on unobserved attributes, a process called homophily. I study parameter identifiability in a simple model of dynamic network formation with both effects. Agents form, maintain, and sever links over time in order to maximize utility. The return to linking may be higher if agents share friends in common. A pair-specific utility component allows for arbitrary homophily on time-invariant agent attributes. I derive conditions under which it is possible to detect the presence of a taste for transitivity in the presence of assortative matching on unobservables. I leave the joint distribution of the initial network and the pair-specific utility component, a very high dimensional object, unrestricted. The analysis is of the 'fixed effects' type. The identification result is constructive, suggesting an analog estimator, whose single large network properties I characterize.
    Keywords: Strategic Network Formation, Homophily, Transitivity, Triads, Assortative Matching, Initial Conditions Problem, Panel Data, Fixed Effects
    JEL: C31 C33 C35
    Date: 2016–04–15
  9. By: SPRUMONT, Yves
    Abstract: We model social choices as acts mapping states of the world to (social) outcomes. A (social choice) rule assigns an act to every profile of subjective expected utility preferences over acts. A rule is strategy-proof if no agent ever has an incentive to misrepresent her beliefs about the world or her valuation of the outcomes; it is ex-post efficient if the act selected at any given preference profile picks a Pareto-efficient outcome in every state of the world. We show that every two-agent ex-post efficient and strategy-proof rule is a top selection: the chosen act picks the most preferred outcome of some (possibly different) agent in every state of the world. The states in which an agent’s top outcome is selected cannot vary with the reported valuations of the outcomes but may change with the reported beliefs. We give a complete characterization of the ex-post efficient and strategy-proof rules in the two-agent, two-state case, and we identify a rich class of such rules in the two-agent case.
    Keywords: Social choice under uncertainty; strategy-proofness; subjective expected utility
    JEL: D71
    Date: 2016
  10. By: Mongin, Philippe; Fleurbaey, Marc
    Abstract: Harsanyi invested his Aggregation Theorem and Impartial Observer Theorem with utilitarian sense, but Sen described them as "representation theorems" with little ethical import. This critical view has never been subjected to full analytical scrutinity. The formal argument we provide here supports the utilitarian relevance of the Aggregation Theorem. Following a hint made by Sen himself, we posit an exogeneous utilitarian ordering that evaluates riskless options by the sum of individual utilities and we show that any social observer who obeys the conditions of the Aggregation Theorem evaluates social states in terms of a weighted variant of this utilitarian sum.
    Keywords: Utilitarianism; Aggregation Theorem; Impartial Observer Theorem; Cardinal utility; VNM utility; Harsanyi; Sen
    JEL: D63 D71 D81
    Date: 2015–09–03
  11. By: Michal Jakubczyk; Dominik Golicki; Maciej Niewada
    Abstract: In most of the religions the preservation of own, God-given, life is obligatory. The time-trade-off method (TTO) forces to voluntarily forego life years. We verify if this is a problem for the religious and how it impacts the TTO results. We used the data from the only EQ-5D valuation in Poland (2008, three-level, 321 respondents, 23 states each) a very religious (mostly catholic) country. We used the belief in afterlife question to measure the religiosity on two levels: strong (definitely yes) and some (also rather yes), both about a third of the sample. The religious on average (yet, not statistically significant) spend more time doing TTO and consider it more difficult. The religious more often are non-traders: odds ratio (OR)=1.97 (strongly), OR=1.55 (rather); and less often consider a state worse-than-death: OR=0.67 (strongly), OR=0.81 (rather). These associations are statistically significant (p
    Keywords: Health-related quality of life, Utility, Preference elicitation, Time trade-off, Religion, Life after death
    JEL: I10 C25 N30 I31
    Date: 2016–04

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