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on Utility Models and Prospect Theory |
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Issue of 2016‒12‒11
ten papers chosen by |
| By: | S. Cerreia-Vioglio; A. Giarlotta; S. Greco; F. Maccheroni; M. Marinacci |
| Abstract: | We study a decision maker characterized by two binary relations. The fi rst reflects his judgments about well-being, his mental preferences. The second describes the decision makers choice behavior, his behavioral preferences, the ones that govern choice (see Rubin- stein and Salant, 2008a,b). Specifi cally, in the context of decision making under uncertainty, we propose axioms that may describe the rationality of these two relations. These axioms allow a joint representation by a single set of probabilities and a single utility function. It is mentally rational to prefer f over g if and only if the expected utility of f is at least as high as that of g for all probabilities in the set. It is behaviorally rationalizable to choose f over g if and only if the expected utility of f is at least as high as that of g for some probability in the set. In other words, mental and behavioral preferences admit, respectively, a representation à la Bewley (2002) and à la Lehrer and Teper (2011). Our results also provide foundation for a decision analysis procedure called robust ordinal regression and proposed by Greco, Mousseau, and Slowinski (2008). |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:589&r=upt |
| By: | Anna Bartczak (Faculty of Economic Sciences, University of Warsaw; Warsaw Ecological Economics Center); Susan Chilton (Newcastle University Business School); Mikołaj Czajkowski (Faculty of Economic Sciences, University of Warsaw); Jürgen Meyerhoff (Institute for Landscape and Environmental Planning, Technische Universität Berlin) |
| Abstract: | We examine how the direction of price changes affects the value people place on avoiding renewable energy externalities in Poland. Additionally, we investigate the influence of individuals’ financial loss aversion and financial risk preferences on this valuation. In our study we conduct a choice experiment survey in which respondents’ choices indicate the value they place on avoiding wind, solar, and biomass externalities. We combine this survey with a financial lottery choice task that elicits the respondents’ risk preferences and degree of loss aversion. In the choice experiment we use both increases and decreases in electricity bills to depict the uncertain effect of new sources of energy generation on the current price level. This design allows us to investigate if obtained values are independent of the payment mechanism. In the analyzed context, our results indicate that marginal utility of money seems to be lower with a rebate on the energy bill than with a surcharge. Moreover, financial risk preferences affect people’s choices in a case of a surcharge, while loss aversion for money affects them in the case of a rebate. We find that the more loss averse people are with regard to money, the more they require compensation before they accept externalities from renewable electricity production. In contrast, the more risk seeking people are in a financial domain, the less cost sensitive they are and the more willing they are to pay for proposed changes in renewable electricity generation. |
| Keywords: | choice experiment, externalities of renewable energy, loss aversion, lottery experiment, marginal utility of money, risk preferences |
| JEL: | D81 Q20 Q42 Q49 Q51 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2016-36&r=upt |
| By: | Oliver März |
| Abstract: | Recent theories of expectation-based reference-dependent preferences offer a structured approach of the formation of reference points, yet do not incorporate important context-specific characteristics. One implicit assumption is that individuals form their reference point as expectations by correctly predicting the probabilistic environment they are facing. In an experimental setup, we demonstrate that a simple change in the framing of a decision problem alters the reference point formation by evoking a different moment of first focus. Apart from providing evidence on the limitations of current theories of expectation-based reference dependence, this paper further offers a theoretical extension that overcomes these limitations and allows reference points to be contingent on contextual effects. |
| Keywords: | framing; expectations; stochastic reference points; salience effects |
| JEL: | C91 D81 D84 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/240785&r=upt |
| By: | Pierre-André Chiappori (Columbia University); Monica Costa Dias (Institute for Fiscal Studies); Costas Meghir (Yale University) |
| Abstract: | We develop an equilibrium lifecycle model of education, marriage, labor supply and consumption in a transferable utility context. Individuals start by choosing their investments in education anticipating returns in the marriage market and the labor market. They then match based on the economic value of marriage and on preferences. Equilibrium in the marriage market determines intrahousehold allocation of resources. Following marriage households (married or single) save, supply labor and consume private and public commodities under uncertainty. Marriage thus has the dual role of providing public goods and offering risk sharing. The model is estimated using the British HPS. |
| Keywords: | equilibrium, marriage market, matching, intrahousehold resource allocation, risk sharing |
| JEL: | D58 I00 C78 D13 D81 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2016-028&r=upt |
| By: | Ellen Garbarino (University of Sydney Business School, Department of Marketing, Abercrombie building, NSW 2006 Sydney, Australia); Robert Slonim (University of Sydney, Department of Economics, Merewether building, NSW 2006 Sydney, Australia; IZA, Bonn, Germany); Marie Claire Villeval (Univ Lyon, Université Lyon 2, GATE L-SE UMR 5824, F-69342 Lyon, France) |
| Abstract: | We theoretically show that agents with loss-averse preferences are more likely to lie to avoid receiving a financially bad outcome the lower the probability of this bad outcome. The increased dishonesty occurs due to the expected payoff increasing as the bad outcome becomes less likely, and hence the greater the loss that can be avoided by lying. We demonstrate robust support for this role of loss aversion on lying by reanalyzing the results from the extant literature covering 74 studies and 363 treatments, and from two new experiments that vary the outcome probabilities and examine lying for personal gain and for gains to causes one supports or opposes. To measure and compare lying behavior across treatments and studies, we develop an empirical method that estimates the full distribution of dishonesty when agents privately observe the outcome of a random process and can misreport what they observed. |
| Keywords: | Gender, loss aversion, dishonesty, econometric estimation, experimental economics, lying |
| JEL: | C91 C81 D03 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1631&r=upt |
| By: | Pierre-André Chiappori (Columbia University); Bernard Salanié (Columbia University); Yoram Weiss (Tel Aviv University) |
| Abstract: | We construct a model of household decision-making in which agents consume a private and a public good, interpreted as children's welfare. Children's utility depends on their human capital, which is produced from parental time and human capital. We first show that as returns to human capital increase, couples at the top of the income distribution should spend more time on children. This in turn should reinforce assortative matching, in a sense we precisely define. We then embed the model into a Transferable Utility matching framework with random preferences a la Choo and Siow (2006) which we estimate on US marriage data for individuals born between 1943 and 1972. We find that the preference for assortative matching by education has significantly increased for the white population, particularly for highly educated individuals; but not for blacks. Moreover, in line with theoretical predictions, we find that the "marital college-plus premium" has increased for women but not for men. |
| Keywords: | human capital, college premium, assortative matching, transferable utility |
| JEL: | D13 J24 C78 I00 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2016-027&r=upt |
| By: | Tim Leung; Hyungbin Park |
| Abstract: | This paper studies the long-term growth rate of expected utility from holding a leveraged exchanged-traded fund (LETF), which is a constant proportion portfolio of the reference asset. Working with the power utility function, we develop an analytical approach that employs martingale extraction and involves finding the eigenpair associated with the infinitesimal generator of a Markovian time-homogeneous diffusion. We derive explicitly the long-term growth rates under a number of models for the reference asset, including the geometric Brownian motion model, GARCH model, inverse GARCH model, extended CIR model, 3/2 model, quadratic model, as well as the Heston and 3/2 stochastic volatility models. We also investigate the impact of stochastic interest rate such as the Vasicek model and the inverse GARCH short rate model. We determine the optimal leverage ratio for the long-term investor and examine the effects of model parameters. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1612.01013&r=upt |
| By: | Simon Dietz; Oliver Walker |
| Abstract: | Many insurance contracts are contingent on events such as hurricanes, terrorist attacks or political upheavals, whose probabilities are ambiguous. This paper offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer who maximises profit subject to a survival constraint that is sensitive to the range of estimates of the probability of ruin, as well as the insurer’s attitude towards this ambiguity. We characterise when one book of insurance is more ambiguous than another and general circumstances in which a more ambiguous book requires at least as large a capital holding. We subsequently derive several explicit formulae for the price of insurance contracts under ambiguity, each of which identifies the extra ambiguity load. |
| Keywords: | ambiguity; ambiguity aversion; ambiguity load; capital requirement; catastrophe risk; insolvency; insurance; more ambiguous; reinsurance; ruin; uncertainty; Solvency II |
| JEL: | D81 G22 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68469&r=upt |
| By: | Ewa Zawojska (Faculty of Economic Sciences, University of Warsaw); Pierre-Alexandre Mahieu (University of Nantes, LEMNA); Romain Crastes (University of Leeds, Centre of Choice Modelling); Jordan Louviere |
| Abstract: | Stated preference (SP) surveys often use open-ended questions to elicit individuals’ willingness-to-pay values for goods, services, or policy projects. However, an open-ended format may encourage strategic overbidding, and so lead to biased value estimates. We propose a new approach, based on economic theory, to limit strategic overbidding in open-ended SP surveys: prior to the valuation question, respondents are told that their insincere responses will be (unfavourably) recoded as zeros. We develop a theoretical model and verify its predictions in a field SP study. We find that the approach works: respondents aware of subsequent unfavourable recoding of their insincere answers state significantly lower willingness-to-pay values. |
| Keywords: | stated preferences, contingent valuation, open-ended survey, strategic overbidding, recoding approach |
| JEL: | C80 D01 D11 D12 D61 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2016-34&r=upt |
| By: | Crawford, Gregory S.; Griffith, Rachel; Iaria, Alessandro |
| Abstract: | We present a method to estimate preferences in the presence of unobserved choice set heterogeneity. We build on the insights of Chamberlain's Fixed-Effect Logit and exploit information in observed purchase decisions in either panel or cross-section environments to construct "sufficient sets" of choices that lie within consumers' true but unobserved choice sets. This allows us to recover preference parameters without having to specify the process of choice set formation. We illustrate our ideas by estimating demand for chocolate bars on-the-go using individual-level data from the UK. Our results show that failing to account for unobserved choice set heterogeneity can lead to statistically and economically significant biases in the estimation of preference parameters. |
| Keywords: | attention; discrete choice demand estimation; endogenous product choice; search; sufficient sets; unobserved choice set heterogeneity |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11675&r=upt |