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on Utility Models and Prospect Theory |
| By: | Breitmoser, Yves |
| Abstract: | Individual choice exhibits "presentation effects" such as default, ordering and round-number effects. Using existing models, presentation effects bias utility estimates, which suggests instability of preferences and obscures behavioral patterns. This paper derives a generalized model of stochastic choice by weakening logit's axiomatic foundation. Weakening the axioms implies that focality of options is choice-relevant, alongside utility, which entails presentation effects. The model is tested on four well-known studies of dictator games exhibiting typical round-number patterns. The generalized logit model captures the choice patterns reliably, substantially better than existing models: it robustly predicts and controls for the round-number effects, thus provides "clean" utility estimates that are stable and predictive across experiments. |
| Keywords: | stochastic choice, systematic mistakes, axiomatic foundation, utility estimation, dictator game |
| JEL: | C10 C90 D03 |
| Date: | 2016–07–28 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Christoph Czichowsky; R\'emi Peyre; Walter Schachermayer; Junjian Yang |
| Abstract: | We continue the analysis of our previous paper (Czichowsky/Schachermayer/Yang 2014) pertaining to the existence of a shadow price process for portfolio optimisation under proportional transaction costs. There, we established a positive answer for a continuous price process $S=(S_t)_{0\leq t\leq T}$ satisfying the condition $(NUPBR)$ of "no unbounded profit with bounded risk". This condition requires that $S$ is a semimartingale and therefore is too restrictive for applications to models driven by fractional Brownian motion. In the present paper, we derive the same conclusion under the weaker condition $(TWC)$ of "two way crossing", which does not require $S$ to be a semimartingale. Using a recent result of R.~Peyre, this allows us to show the existence of a shadow price for exponential fractional Brownian motion and $all$ utility functions defined on the positive half-line having reasonable asymptotic elasticity. Prime examples of such utilities are logarithmic or power utility. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Philipp Renner (Stanford University - The Hoover Institution on War, Revolution and Peace); Karl Schmedders (University of Zurich) |
| Abstract: | This paper contributes to the theoretical and numerical analysis of discrete time dynamic principal-agent problems with continuous choice sets. We first provide a new and simplified proof for the recursive reformulation of the sequential dynamic principal-agent relationship. Next we prove the existence of a unique solution for the principal's value function, which solves the dynamic programming problem in the recursive formulation, by showing that the Bellman operator is a contraction mapping. Therefore, the theorem also provides a convergence result for the value function iteration. To compute a solution for the problem we have to solve a collection of static principal-agent problems at each iteration. Under the assumption that the agent's expected utility is a rational function of his action, we can transform the bi-level optimization problem into a standard nonlinear program (NLP). We can then solve these nonlinear problems with a standard NLP solver. The final results of our solution method are numerical approximations of the policy and value functions for the dynamic principal-agent model. We illustrate our solution method by solving variations of two prominent social planning models from the economics literature. |
| Keywords: | Optimal unemployment tax, principal-agent model, repeated moral hazard |
| JEL: | C63 D80 D82 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Redding, Stephen J.; Weinstein, David E. |
| Abstract: | The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers. |
| Keywords: | consumer valuation bias; elasticity of substitution; new goods; price index; welfare |
| JEL: | D11 D12 E01 E31 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Huy N. Chau; Miklos Rasonyi |
| Abstract: | We consider the problem of utility maximization for investors with power utility functions. Building on the earlier work Larsen et al. (2014), we prove that the value of the problem is a Frechet-differentiable function of the drift of the price process, provided that this drift lies in a suitable Banach space. We then study optimal investment problems with non-Markovian driving processes. In such models there is no hope to get a formula for the achievable maximal utility. Applying results of the first part of the paper we provide first order expansions for certain problems involving a fractional Brownian motion either in the drift or in the volatility. We also point out how asymptotic results can be derived for models with strong mean reversion. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Dietzenbacher, Bas (Tilburg University, Center For Economic Research); Estévez-Fernández, A.; Borm, Peter (Tilburg University, Center For Economic Research); Hendrickx, Ruud (Tilburg University, Center For Economic Research) |
| Abstract: | This paper analyzes bankruptcy problems with nontransferable utility as a generalization of bankruptcy problems with monetary estate and claims. Following the classical axiomatic theory of bankruptcy, we formulate some appropriate properties for NTU-bankruptcy rules and study their implications. We explore duality of bankruptcy rules and we derive several characterizations of the generalized proportional rule and the constrained relative equal awards rule. |
| Keywords: | NTU-bankruptcy problem; axiomatic analysis; duality; proportional rule; constrained relative equal awards rule |
| JEL: | C79 C63 D74 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Simone Cerreia Vioglio; Fabio Maccheroni; Massimo Marinacci |
| Abstract: | We study absolute and relative attitudes toward ambiguity, determined by wealth effects, from a preferential viewpoint. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Morone, Andrea; Temerario, Tiziana |
| Abstract: | The recent literature on individual and group choices over risk has led to different results. In some studies under unanimity, groups were found to be less risk averse than individuals, while those under majority did not highlight significant differences. However, both the types of studies impose the decision rule to the group. In the present work we elicited groups’ preference under risk using a consensus rule, i.e. groups are free to solve disagreement endogenously, just as in the real life. Results from our pairwise choices experiment shows that when group members are free to use any rule they want in order to reach unanimity, there is no statistical difference between individuals’ and groups’ risk aversion. |
| Keywords: | Risk; uncertainty; decision-making; group decision; lottery; experimental economics; experiment; |
| JEL: | C92 D81 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Rossi, Barbara; Sekhposyan, Tatevik; Soupre, Mattheiu |
| Abstract: | We propose a decomposition to distinguish between Knightian uncertainty (ambiguity) and risk, where the first measures the uncertainty about the probability distribution generating the data, while the second measures uncertainty about the odds of the outcomes when the probability distribution is known. We use the Survey of Professional Forecasters (SPF) density forecasts to quantify overall uncertainty as well as the evolution of the different components of uncertainty over time and investigate their importance for macroeconomic fluctuations. We also study the behavior and evolution of the various components of our decomposition in a model that features ambiguity and risk. |
| Keywords: | Ambiguity; Knightian Uncertainty; Predictive Densities.; risk; Survey of Professional Forecasters; uncertainty |
| JEL: | C22 C52 C53 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Drichoutis, Andreas C.; Klonaris, Stathis; Papoutsi, Georgia |
| Abstract: | We evaluate the claim that bottle size formats signal quality changes, using a controlled laboratory experiment where we simultaneously auctioned two different sweet wines: a pomegranate wine and a grape wine. We varied on a between subjects basis the size of the bottle, from 500ml to 750ml, but kept the wine content of the bottle constant across bottle size formats. We also explored in a within subjects design the effect of expectations for the wines, blind tasting and information on willingness to pay. For the grape wine we find evidence consistent with diminishing marginal utility while for the pomegranate wine we find a premium for the smaller bottle size which is consistent with changes in perceived scarcity of the wine. We also find that information is adequate in offsetting the negative effect from the tasting treatment. |
| Keywords: | second price auction; laboratory experiment; wine; sensory analysis; willingness to pay; bottle size effect |
| JEL: | C23 C24 C91 D12 M31 |
| Date: | 2016–07–26 |
| URL: | http://d.repec.org/n?u=&r=upt |
| By: | Elettra Agliardi (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy) |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=&r=upt |