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on Utility Models and Prospect Theory |
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Issue of 2016‒12‒04
twenty papers chosen by |
| By: | Drew Zhu |
| Abstract: | According to the new attribute theory that is based on but different than Lancasterâs attribute theory, the paper builds a linear programming model of minimizing food cost subject to four nutrient requirements and derives a system of food demand functions from this model with a programming method. This derivation is independence of any utility function and at least is an exception of the utility theory. The programming method, which is neither a parametric nor a typically non-parametric method, allows us to thoroughly understand the mechanism of demandâs formation. The conclusion implies that the new attribute theory and the programming method might be an alternative approach to utility theory and the related estimation methods to derive the demand system. |
| JEL: | C61 D01 D11 D12 |
| Date: | 2016–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2016:pzh519&r=upt |
| By: | Harin, Alexander |
| Abstract: | In random–lottery incentive methods, the choices of certain (sure) outcomes are stimulated by uncertain lotteries. This inconsistency is evident, but only recently revealed. Certain and uncertain outcomes can differ from each other. The revealed inconsistency can hide this possible difference. The cause is: under the condition of the uncertain incentive, the questioned subjects can treat a certain outcome as an uncertain one. The considered critical empirical insight should be kept in mind by both theoreticians and practitioners. It leads also to more general questions of comparison of sure and probable (uncertain) outcomes those should be clarified to increase our understanding of behavior problems. |
| Keywords: | decision; utility; experiment; economics; management; psychology; business; |
| JEL: | C1 C9 C91 C93 D8 D81 |
| Date: | 2016–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75311&r=upt |
| By: | Michał Brzoza-Brzezina; Jacek Kotlowski |
| Abstract: | Country risk premia can substantially affect macroeconomic dynamics. We concentrate on one of their most important determinants - a country’s net foreign asset position and - in contrast to the existing research - investigate its nonlinear link to risk premia. The importance of this particular nonlinearity is twofold. First, it allows to identify the NFA level above which the elasticity becomes much (possibly dangerously) higher. Second, such a nonlinear relationship is a standard ingredient of DSGE models, but its proper calibration/ estimation is missing. Our estimation shows that indeed the link is highly nonlinear and helps to identify the NFA position where the nonlinearity kicks in at -70% to -80% of GDP. We also provide a proper calibration of the risk premium - NFA relationship used in DSGE models and demonstrate that its slope matters significantly for economic dynamics in such a model. |
| Keywords: | Risk premium, PSTR model, open economy DSGE model |
| JEL: | C23 E43 E44 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:250&r=upt |
| By: | Sven Banisch; Eckehard Olbrich |
| Abstract: | In this paper, we develop an agent-based version of the Diamond search equilibrium model - also called Coconut Model. In this model, agents are faced with production decisions that have to be evaluated based on their expectations about the future utility of the produced entity which in turn depends on the global production level via a trading mechanism. While the original dynamical systems formulation assumes an infinite number of homogeneously adapting agents obeying strong rationality conditions, the agent-based setting allows to discuss the effects of heterogeneous and adaptive expectations and enables the analysis of non-equilibrium trajectories. Starting from a baseline implementation that matches the asymptotic behavior of the original model, we show how agent heterogeneity can be accounted for in the aggregate dynamical equations. We then show that when agents adapt their strategies by a simple temporal difference learning scheme, the system converges to one of the fixed points of the original system. Systematic simulations reveal that this is the only stable equilibrium solution. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1612.00221&r=upt |
| By: | Nicolas Sirven (LIRAES - Laboratoire Interdisciplinaire de Recherche Appliquée en Economie de la Santé - UPD5 - Université Paris Descartes - Paris 5); Thomas Barnay (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We estimate a reduced form model of expectations-based reference-dependent preferences to explain job retention of older workers in Europe in the context of the 2009 economic crisis. Using individual micro-economic longitudinal data from SHARE (The Survey of ealth, Ageing, and Retirement in Europe) between 2006 and 2011, we derive a measure of “good, bad or no surprise” from (i) workers’ anticipated evolution of their standard of living five years from 2006 (reference point), and from (ii) a comparison of their capacity to make-ends-meet between 2006 and 2011. We find that the probability to remain on the labour market in 2011 is significantly higher for individuals who experienced a lower than expected standard of living. The effect of a “bad surprise” on job retention is larger than the effect of a “good surprise” once netted out from the effects of expectations at baseline, change in consumption utility, and the usual lifecycle determinants on job retention of older workers. We interpret this result as an evidence of loss aversion in the case the reference point is based on individuals’ expectations. We also find that loss aversion is more common among men, risk-averse individuals and those with a higher perceived life expectancy. |
| Keywords: | Job retention, Behavioural economics, Loss aversion, SHARE data |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01374462&r=upt |
| By: | Andrew Ellis; Michele Piccione |
| Abstract: | We present a decision-theoretic analysis of an agent’s understanding of the interdependencies in her choices. We provide the foundations for a simple and flexible model that allows the misperception of correlated risks. We introduce a framework in which the decision maker chooses a portfolio of assets among which she may misperceive the joint returns, and present simple axioms equivalent to a representation in which she attaches a probability to each possible joint distribution over returns and then maximizes subjective expected utility using her (possibly misspecified) beliefs. |
| JEL: | G32 F3 G3 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68326&r=upt |
| By: | Da-Rocha, Jose-Maria; García-Cutrin, Javier; Gutierrez, Maria Jose; Touze, Julia |
| Abstract: | In a biomass model a CES function generates an exploitation rate that is directly proportional to the scarcity of the resource: resources with less biomass are subjected to lower exploitation rates. In this paper we investigate the implications of introducing invariant intertemporal preferences as to yield stability in age-structured fishery problem. Our results show that a CES function in an age-structured bioeconomic model produces links between the scarcity of the resource (measured as the weighted sum of the size of the cohorts, which is similar to the Shannon index) and the exploitation of the resource over a complete cycle, the duration of which is equivalent to the number of age groups of the resource. Given that multiple paths can be constructed that regenerate the population of the resources (the age pyramid) over the course of the cycle, optimum harvest allocation means selecting the one that permits the biggest catch at the beginning of the cycle. Smoother exploitation path towards the stationary values are achieved by catching more in periods when there is less biomass in exchange for catching less when the biomass recovers, which results in exploitation rates that are not directly proportional to the scarcity of the resource. Moreover, we show that introducing non-constant discount rates into age-structured models enables exploitation rates proportional to the scarcity of the resource to be recouped |
| Keywords: | Optimisation in age-structure models, Stability preferences, Natural resource management, Constant-elasticity-of-substitution utility function |
| JEL: | Q5 |
| Date: | 2016–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75298&r=upt |
| By: | Merkel, Anna; Lohse, Johannes |
| Abstract: | Economists are increasingly interested in the cognitive basis of pro-social behavior. Using response time data, several authors have claimed that "fairness is intuitive". In light of conflicting empirical evidence, we provide theoretical arguments showing under which circumstances an increase in "fair" behavior due to time pressure provides unambiguous evidence in favor of the "fairness is intuitive" hypothesis. Drawing on recent applications of the Drift Diffusion Model (Krajbich et al., 2015a), we demonstrate how the subjective difficulty of making a choice affects choices under time pressure and time delay, thereby making an unambiguous interpretation of time pressure effects contingent on the choice situation. To explore our theoretical considerations and to retest the "fairness is intuitive" hypothesis, we analyze choices in two-person prisoner’s dilemma and binary dictator games. As in previous experiments, we exogenously manipulate response times by placing subjects under time pressure or forcing them to delay their decisions. In addition, we manipulate the subjective difficulty of choosing the fair relative to the selfish option across all choice situations. Our main finding is that time pressure does not increase the fraction of fair choices relative to time delay irrespective of the subjective difficulty of choosing the fair option. Hence, our results cast doubt on the hypothesis that "fairness is intuitive". |
| Keywords: | distributional preferences; cooperation; response times; time pressure; cognitive processes; drift diffusion models |
| Date: | 2016–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0627&r=upt |
| By: | Hedlund, Jonas; Oyarzun, Carlos |
| Abstract: | We study a boundedly rational model of imitation when payoff distributions of actions differ across types of individuals. Individuals observe others’ actions and payoffs, and a comparison signal. One of two inefficiencies always arises: (i) uniform adoption, i.e., all individuals choose the action that is optimal for one type but sub-optimal for the other, or (ii) dual incomplete learning, i.e., only a fraction of each type chooses its optimal action. Which one occurs depends on the composition of the population and how critical the choice is for different types of individuals. In an application, we show that a monopolist serving a population of boundedly rational consumers cannot fully extract the surplus of high-valuation consumers, but can sell to consumers who do not value the good. |
| Keywords: | Imitation;heterogeneouspopulations;boundedrationality;Fubiniextension. |
| Date: | 2016–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0625&r=upt |
| By: | João Ferreira (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales) |
| Abstract: | The common interpretation given to choice behavior that satisfies the traditional revealed preference axioms is that it results from the maximization of a single preference. We show that choice data alone does not enable one to rule out the possibility that the choice behavior that satisfies the revealed preference axioms is instead the result of the aggregation of a collection of distinct preferences. In particular, we show that any ordering is observationally equivalent to a majoritarian aggregation of a collection of distinct dichotomous orderings. We also show that any ordering is observationally equivalent to a Borda's aggregation of a collection of distinct linear orderings. |
| Keywords: | revealed preference theory,rationalization,dichotomous preferences,aggregation rules,choice data |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01386451&r=upt |
| By: | Elena Krasnokutskaya (Johns Hopkins University); Przemyslaw Jeziorski (UC Berkeley) |
| Abstract: | We use the data on multiple years of contract choices and claims by customers of a major Portuguese car insurance company to investigate a possibility that agent’s risk is modifiable through costly (unobserved) effort. Using a model of contract choice and endogenous risk production we demonstrate the economic importance of moral hazard, measure the relative importance of agents’ private information on cost of reducing risk and risk aversion, and evaluate the relative effectiveness of dynamic versus static contract features in incentivizing effort and inducing sorting on unobserved risk. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1514&r=upt |
| By: | Sylvain Béal (CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté, UBFC - Université Bourgogne Franche-Comté); André Casajus (Leipzig Graduate School of Management); Frank Huettner (Leipzig Graduate School of Management) |
| Abstract: | We study values for transferable utility games enriched by a communication graph (CO-games) where the graph does not necessarily affect the productivity but can influence the way the players distribute the worth generated by the grand coalition. Thus, we can envisage values that are efficient instead of values that are component efficient. For CO-games with connected graphs, efficiency and component efficiency coincide. In particular, the Myerson value (Myerson, 1977) is efficient for such games. Moreover, fairness is characteristic of the Myerson value. We identify the value that is efficient for all CO-games, coincides with the Myerson value for CO-games with connected graphs, and satisfies fairness. |
| Keywords: | efficiency, fairness,communication graph, efficient extension, Shapley value,Myerson value |
| Date: | 2015–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01376904&r=upt |
| By: | Marc-Arthur Diaye (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne); André Lapidus (PHARE - Philosophie, Histoire et Analyse des Représentations Economiques - UNIVERSITE PARIS 1 PANTHEON-SORBONNE - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Until recently, little attention has been paid to the consequences of Hume's theory of action upon intertemporal decision. Nonetheless, some of their specicities have been emphasized by G. Davis 2003, A. Lapidus 2000, 2010, and I. Palacios-Huerta 2003. Through recurring discussions, concerning situations of conicting choice between a close and a remote objective, which run from the Treatise, Book 2 (Hume 1739-40), to the second Enquiry (Hume 1751) to the Dissertation (Hume 1757), intertemporal decision appears, at least for a part of it, as an outcome of the role of the natural relation of contiguity in the formation of a structure of desires, dierent from the structure of pleasure. This paper shows, and expresses formally, that Hume's approach provides alternative conditions explaining on the one hand time-consistency and, on the other hand, time-inconsistency when the link between contiguity and the violence of the passions is taken into account. The possibility of time-inconsistency is acknowledged by Hume as giving rise to general aversion, therefore constituting a key argument for explaining the origin of government. |
| Keywords: | Hume,intertemporal decision,pleasure,belief,passion,desire,government |
| Date: | 2016–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01372527&r=upt |
| By: | Mikhail Timonin |
| Abstract: | The Choquet integral is a powerful aggregation operator which lists many well-known models as its special cases. We look at these special cases and provide their axiomatic analysis. In cases where an axiomatization has been previously given in the literature, we connect the existing results with the framework that we have developed. Next we turn to the question of learning, which is especially important for the practical applications of the model. So far, learning of the Choquet integral has been mostly confined to the learning of the capacity. Such an approach requires making a powerful assumption that all dimensions (e.g. criteria) are evaluated on the same scale, which is rarely justified in practice. Too often categorical data is given arbitrary numerical labels (e.g. AHP), and numerical data is considered cardinally and ordinally commensurate, sometimes after a simple normalization. Such approaches clearly lack scientific rigour, and yet they are commonly seen in all kinds of applications. We discuss the pros and cons of making such an assumption and look at the consequences which axiomatization uniqueness results have for the learning problems. Finally, we review some of the applications of the Choquet integral in decision analysis. Apart from MCDA, which is the main area of interest for our results, we also discuss how the model can be interpreted in the social choice context. We look in detail at the state-dependent utility, and show how comonotonicity, central to the previous axiomatizations, actually implies state-independency in the Choquet integral model. We also discuss the conditions required to have a meaningful state-dependent utility representation and show the novelty of our results compared to the previous methods of building state-dependent models. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1611.09926&r=upt |
| By: | Daniela Di Cagno; Arianna Galliera; Werner Güth; Francesca Marzo; Noemi Pace |
| Abstract: | A risky choice experiment is based on one-dimensional choice variables and risk neutrality induced via binary lottery incentives. Each participant confronts many parameter constellations with varying optimal payoffs. We assess (sub)optimality, as well as (non)optimal satisficing, partly by eliciting aspirations in addition to choices. Treatments differ in the probability that a binary random event, which are payoff- but not optimal choice–relevant, is experimentally induced and whether participants choose portfolios directly or via satisficing, i.e., by forming aspirations and checking for satisficing before making their choice. By incentivizing aspiration formation, we can test satisficing, and in cases of satisficing, determine whether it is optimal. |
| Keywords: | (un)Bounded Rationality, Satisficing, Risk, Uncertainty, Experiments |
| JEL: | D03 D81 C91 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:lui:cesare:1603&r=upt |
| By: | Andreas C. Drichoutis (Agricultural University of Athens); Varvara Kechagia (Agricultural University of Athens) |
| Abstract: | Several studies show that sensory cues influence consumer decision making processes. While scent is a key component of a market's physical environment, it has received far less attention in the academic literature as compared, for example, with visual cues. In addition, most of the studies that examine the e ect of ambient scents fail on one or both of these criteria: to properly control the in infuence of nuisance factors and/or to elicit preferences under real monetary incentives. We collected data from a laboratory experiment where we varied on a between subjects basis the dispersion of a citrus fragrance. We then elicited subjects' willingness to pay for two unbranded products | a mug and a chocolate | by having subjects participate in a 2nd price Vickrey auction. We also elicited subjects' risk preferences using lottery choice tasks. Our results show a statistically and economically signi cant e ect on subjects' willingness to pay: valuations increased between 37% - 43% for subjects who were exposed to a citrus scent as compared to the control group. We do not nd a statistically signi cant effect of the citrus scent on subjects' risk aversion. |
| Keywords: | scent cues; fragrance; olfactory; willingness to pay; risk preferences; risk aversion; laboratory experiment |
| JEL: | C91 D44 D81 D87 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:aua:wpaper:2016-4&r=upt |
| By: | Yehuda Izhakian; David Yermack; Jaime F. Zender |
| Abstract: | We examine the importance of ambiguity, or Knightian uncertainty, in the capital structure decision. We develop a static tradeoff theory model in which agents are both risk averse and ambiguity averse. The model con firms the usual idea that increased risk - the uncertainty over known possible outcomes - leads firms to use less leverage. Conversely, greater ambiguity - the uncertainty over the probabilities associated with the outcomes - leads firms to increase leverage. Our empirical analysis provides results consistent with these predictions. |
| JEL: | C65 D81 D83 G32 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22870&r=upt |
| By: | Rohini Kumar; Hussein Nasralah |
| Abstract: | Portfolio optimization is a well-known problem in mathematical finance concerned with selecting a portfolio which will maximize the expected terminal utility of an investor given today's information and subject to some constraints. It has been studied extensively under various assumptions on the market, including completeness. The assumptions on the market and price processes in this paper are the same as those made in [9]. We find a closed-form formula for a portfolio under which the expected utility is close to optimal when the time horizon is small. As in [9], we work with the problem of portfolio optimization via its associated Hamilton-Jacobi-Bellman (HJB) equation. Specifically, we work with the "marginal HJB equation" given in [9]. We find a classical sub- and super-solution to the marginal HJB equation. A comparison principle argument for a logarithmic transformation of the marginal HJB equation then yields the result. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1611.09300&r=upt |
| By: | Pierpaolo Battigalli; Alejandro Francetich; Giacomo Lanzani; Massimo Marinacci |
| Abstract: | We consider an uncertainty averse, sophisticated decision maker facing a recurrent decision problem where information is generated endogenously. In this context, we study self-con firming strategies as the outcomes of a process of active experimentation. We provide inter alia a learning foundation for self-con firming equilibrium with model uncertainty (Battigalli et al., 2015). We also argue that ambiguity aversion tends to stifle experimentation, increasing the likelihood that decision maker get stuck into suboptimal certainty traps. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:588&r=upt |
| By: | KHELIFI, Atef |
| Abstract: | By assuming that the individual derives utility from consumption only, the resulting optimal decision to save in the Ramsey model depends on the rate of return, given a certain time preference. If therefore the production function is such that this rate of return remains relatively low, the individual reacts unconsciously by refusing to save despite the capital depreciates and the household grows. We argue that it is conceptually necessary in that framework to assume a direct preference for saving (or for thriftiness) in the utility function, not only to make the individual behave as a real human being who cares about the survival of the household, but also to account reasonably for any other motives to save or accumulate than the rate of return. We show it generalizes the model in a way to recover static properties of the exogenous Solow version and to extend results of capitalist spirit models following Zou (1994). |
| Keywords: | bequest; status; thriftiness; capitalist spirit; ramsey model |
| JEL: | D9 E0 O4 O40 O41 |
| Date: | 2016–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75365&r=upt |