
on Utility Models and Prospect Theory 
Issue of 2016‒09‒25
seven papers chosen by 
By:  Roman M. Sheremeta (Weatherhead School of Management, Case Western Reserve University and Economic Science Institute, Chapman University) 
Abstract:  Researchers have proposed various theories to explain overbidding in rentseeking contents, including mistakes, systematic biases, the utility of winning, and relative payoff maximization. Through an eightpart experiment, we test and find significant support for the existing theories. Also, we discover some new explanations based on cognitive ability and impulsive behavior. Out of all explanations examined, we find that impulsivity is the most important factor explaining overbidding in contests. 
Keywords:  rentseeking, contest, competition, impulsive behavior, experiments 
JEL:  C72 C91 D01 D72 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:chu:wpaper:1621&r=upt 
By:  Zhixin Xie; Lionel Page; Ben Hardy 
Abstract:  We investigate the nature of gender differences in financial risk taking under time pressure. Motivated by the large gender imbalance on financial trading floor we investigate gender differences under pressure and whether testosterone plays a role in gender differences in risk attitude under pressure. We find that testosterone exposure affects both outcome and probability sensitivity in men. We also find that testosterone exposure makes men relatively more risk seeking and optimistic when having to make risky decision under time pressure. 
Date:  2016–09–23 
URL:  http://d.repec.org/n?u=RePEc:qut:qubewp:wp045&r=upt 
By:  Jerez, Belén 
Abstract:  We analyze a competitive search environment where heterogeneous workers and firms make costly investments (e.g. in education and physical capital, respectively) before they enter the labor market. A key novelty with respect to existing work is that we allow for multidimensional heterogeneity on both sides of the market. Our environment features transferable utility and symmetric information. As in classical hedonic models, wages depend both on the job's and on the worker's matchrelevant characteristics. Yet the presence of search frictions implies that (unlike in those models) markets do not clear. The hedonic wage function and probabilities of finding and filling different jobs are determined endogenously in a competitive search equilibrium. We show that constrained efficient allocations can be determined as optimal solutions to a linear programming problem, whereas the wage function supporting these allocations and associated expected payoffs for workers and firms correspond to the solutions of the `dual' of that linear program. We use this characterization to show that a competitive search equilibrium exist and is constrained efficient under very general conditions. Jerez (2014) makes a similar point in the context of a model where all the matchrelevant characteristics of the traders are exogenous. Here we extend the analysis to allow for twosided exante investments which are potentially multidimensional. The fact that linear programming techniques have been used for the structural estimation of frictionless matching models suggests that our framework is potentially useful for empirical studies of labor markets and other hedonic markets (like that for housing) where search frictions are prevalent 
Keywords:  linear programming and duality theory; competitive hedonic pricing; exante investments; multidimensional twosided heterogeneity; transferable utility; search frictions 
JEL:  D83 D61 D50 
Date:  2016–09 
URL:  http://d.repec.org/n?u=RePEc:cte:werepe:23566&r=upt 
By:  Kozeniauskas, Nicholas; Orlik, Anna; Veldkamp, Laura 
Abstract:  Various types of uncertainty shocks can explain many phenomena in macroeconomics and finance. But does this just amount to inventing new, exogenous, unobserved shocks to explain challenging features of business cycles? This paper argues that three conceptually distinct fluctuations, all called uncertainty shocks, have a common origin. Specifically, we propose a mechanism that generates micro uncertainty (uncertainty about firmlevel shocks), macro uncertainty (uncertainty about aggregate shocks) and higherorder uncertainty (disagreement) shocks from a common origin and causes them to covary, just as they do in the data. When agents use standard maximum likelihood techniques and realtime data to reestimate parameters that govern the probability of disasters, the result is that micro, macro and higherorder uncertainty fluctuate and covary just like their empirical counterparts. Our findings suggest that timevarying disaster risk and the many types of uncertainty shocks are not distinct phenomena. They are outcomes of a quantitatively plausible belief updating process. 
Keywords:  asymmetric information; Business Cycles; disagreement; disaster risk; uncertainty 
Date:  2016–09 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:11501&r=upt 
By:  Escudero Bueno, Laureano F.; Garín Martín, María Araceli; Aranburu Laka, Larraitz; Merino Maestre, María; Pérez Sainz de Rozas, Gloria 
Abstract:  We present a general multistage stochastic mixed 01 problem where the uncertainty appears everywhere in the objective function, constraints matrix and righthandside. The uncertainty is represented by a scenario tree that can be a symmetric or a nonsymmetric one. The stochastic model is converted in a mixed 01 Deterministic Equivalent Model in compact representation. Due to the difficulty of the problem, the solution offered by the stochastic model has been traditionally obtained by optimizing the objective function expected value (i.e., mean) over the scenarios, usually, along a time horizon. This approach (so named risk neutral) has the inconvenience of providing a solution that ignores the variance of the objective value of the scenarios and, so, the occurrence of scenarios with an objective value below the expected one. Alternatively, we present several approaches for risk averse management, namely, a scenario immunization strategy, the optimization of the well known ValueatRisk (VaR) and several variants of the Conditional ValueatRisk strategies, the optimization of the expected mean minus the weighted probability of having a "bad" scenario to occur for the given solution provided by the model, the optimization of the objective function expected value subject to stochastic dominance constraints (SDC) for a set of profiles given by the pairs of threshold objective values and either bounds on the probability of not reaching the thresholds or the expected shortfall over them, and the optimization of a mixture of the VaR and SDC strategies. 
Keywords:  scenario analysis, mixed 01 Deterministic Equivalent Model, risk aversion measures, scenario immunization, VaR, CVAR, meanrisk, stochastic dominance constraints, multistage stochastic mixed 01 optimization 
Date:  2016 
URL:  http://d.repec.org/n?u=RePEc:ehu:biltok:18875&r=upt 
By:  Samuel N. Cohen 
Abstract:  In stochastic decision problems, one often wants to estimate the underlying probability measure statistically, and then to use this estimate as a basis for decisions. We shall consider how the uncertainty in this estimation can be explicitly and consistently incorporated in the valuation of decisions, using the theory of nonlinear expectations. 
Date:  2016–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1609.06545&r=upt 
By:  J. Silvestre,; T. Araújo; M. St. Aubyn 
Abstract:  Macro and microeconomic perspectives are combined in an economic growth model. An agentbased modeling approach is used to develop an overlapping generation framework where endogenous growth is supported by workers that decide to study depending on their relative (skilled and unskilled) indi vidual satisfaction. The micro perspective is based on individual satisfaction: an utility function computed from the variation of the relative income in both space and time. The macro perspective emerges from micro decisions, and, as in other growth models of this type, concerns an important allocative social decision the share of the working population that is engaged in producing ideas (skilled workers). Simulations show that production and satisfaction levels are higher when the evolution of income measured in both space and time are equally weighted. Key Words : agent modeling, education, heterogeneous human capital, economic growth, individual satisfaction. 
Date:  2016–09 
URL:  http://d.repec.org/n?u=RePEc:ise:isegwp:wp192016&r=upt 