nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2016‒09‒25
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Impulsive Behavior in Competition: Testing Theories of Overbidding in Rent-Seeking Contests By Roman M. Sheremeta
  2. Investigating gender differences under time pressure in financial risk taking By Zhixin Xie; Lionel Page; Ben Hardy
  3. Competitive Search Equilibrium with Multidimensional Heterogeneity and Two-Sided Ex-ante Investments By Jerez, Belén
  4. The Common Origin of Uncertainty Shocks By Kozeniauskas, Nicholas; Orlik, Anna; Veldkamp, Laura
  5. Risk management for mathematical optimization under uncertainty By Escudero Bueno, Laureano F.; Garín Martín, María Araceli; Aranburu Laka, Larraitz; Merino Maestre, María; Pérez Sainz de Rozas, Gloria
  6. Data-driven nonlinear expectations for statistical uncertainty in decisions By Samuel N. Cohen
  7. Economic growth and individual satisfaction in an agent-based economy By J. Silvestre,; T. Araújo; M. St. Aubyn

  1. 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 rent-seeking contents, including mistakes, systematic biases, the utility of winning, and relative payoff maximization. Through an eight-part 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: rent-seeking, contest, competition, impulsive behavior, experiments
    JEL: C72 C91 D01 D72
    Date: 2016
  2. 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
  3. 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 match-relevant 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 match-relevant characteristics of the traders are exogenous. Here we extend the analysis to allow for two-sided ex-ante 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; ex-ante investments; multidimensional two-sided heterogeneity; transferable utility; search frictions
    JEL: D83 D61 D50
    Date: 2016–09
  4. 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 firm-level shocks), macro uncertainty (uncertainty about aggregate shocks) and higher-order 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 real-time data to re-estimate parameters that govern the probability of disasters, the result is that micro, macro and higher-order uncertainty fluctuate and covary just like their empirical counterparts. Our findings suggest that time-varying 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
  5. 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 0-1 problem where the uncertainty appears everywhere in the objective function, constraints matrix and right-hand-side. 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 0-1 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 Value-at-Risk (VaR) and several variants of the Conditional Value-at-Risk 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 0-1 Deterministic Equivalent Model, risk aversion measures, scenario immunization, VaR, CVAR, mean-risk, stochastic dominance constraints, multistage stochastic mixed 0-1 optimization
    Date: 2016
  6. 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
  7. By: J. Silvestre,; T. Araújo; M. St. Aubyn
    Abstract: Macro and micro-economic perspectives are combined in an economic growth model. An agent-based 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

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