nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2016‒12‒18
eight papers chosen by

  1. Expectations, Satisfaction, and Utility from Experience Goods: A Field Experiment in Theaters By Ayelet Gneezy; Uri Gneezy; Joan Llull; Pedro Rey-Biel
  2. Individual and Group Preferences Over Risk: An Experiment By Morone, Andrea; Temerario, Tiziana
  3. Dynamic Convex Duality in Constrained Utility Maximization By Yusong Li; Harry Zheng
  4. Policy Choice and Product Bundling in a Complicated Health Insurance Market: Do People get it Right? By Nathan Kettlewell
  5. Forecasting the equity risk premium with frequency-decomposed predictors By Gonçalo Faria; Fabio Verona
  6. Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Model By Federico Favaretto; Donato Masciandaro
  7. Consensus income distribution By Stark, Oded; Falniowski, Fryderyk; Jakubek, Marcin
  8. Risk averse fractional trading using the current drawdown By Stanislaus Maier-Paape

  1. By: Ayelet Gneezy; Uri Gneezy; Joan Llull; Pedro Rey-Biel
    Abstract: Understanding what affects satisfaction from consumption is fundamental to studying economic behavior. However, measuring subjective hedonic experiences is not trivial, in particular when studying experience goods in which quality is difficult to observe prior to consumption. We report the results of a field experiment with a theater show in which the audience pays at the end of the show under pay-what-you-want pricing. Using questionnaires, we measure expected enjoyment before the show, as well as the realized enjoyment after. Correlating the amounts paid with the expected and realized enjoyment, we find that individuals with a larger gap between reported expectations and enjoyment pay significantly more. Once we account for the satisfaction gap, the level of expected enjoyment or realized enjoyment has no significant effect in predicting payments.
    Keywords: experience goods; pay-what-you-want; expectations
    JEL: C72 C91 D81
    Date: 2016–11
  2. 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: Group Preferences,Risk,Individual Preferences,Lab
    JEL: C9 C90
    Date: 2016
  3. By: Yusong Li; Harry Zheng
    Abstract: In this paper, we study a constrained utility maximization problem following the convex duality approach. After formulating the primal and dual problems, we construct the necessary and sufficient conditions for both the primal and dual problems in terms of FBSDEs plus additional conditions. Such formulation then allows us to explicitly characterize the primal optimal control as a function of the adjoint process coming from the dual FBSDEs in a dynamic fashion and vice versa. Moreover, we also find that the optimal primal wealth process coincides with the adjoint process of the dual problem and vice versa. Finally we solve three constrained utility maximization problems, which contrasts the simplicity of the duality approach we propose and the technical complexity of solving the primal problems directly.
    Date: 2016–12
  4. By: Nathan Kettlewell (School of Economics, UNSW Business School, UNSW)
    Abstract: This paper evaluates health insurance policy selection and how this interacts with product bundling by using a discrete choice experiment closely calibrated to the Australian private health insurance market. The experimental approach overcomes some limitations of revealed preference research in this area. The results indicate that consumers are likely to make choices that violate expected utility theory, use heuristic decision strategies, and over-insure relative to minimising out-of-pocket costs. Decision quality is significantly lower when choosing a bundled hospital/ancillaries health insurance policy (compared to stand-alone ancillaries cover), which is the policy type most consumers purchase in Australia.
    Keywords: health insurance, heuristics, choice consistency, discrete choice experiment, latent class logit
    JEL: I13 D81 D03
    Date: 2016–10
  5. By: Gonçalo Faria (Católica Porto Business School and CEGE, Universidade Católica Portuguesa); Fabio Verona (Bank of Finland and CEF.UP)
    Abstract: We show that the out-of-sample forecast of the equity risk premium can be significantly improved by taking into account the frequency-domain relationship between the equity risk premium and several potential predictors. We consider fifteen predictors from the existing literature, for the out-of-sample forecasting period from January 1990 to December 2014. The best result achieved for individual predictors is a monthly out-of-sample R2 of 2.98 % and utility gains of 549 basis points per year for a mean-variance investor. This performance is improved even further when the individual forecasts from the frequency- decomposed predictors are combined. These results are robust for different subsamples, including the Great Moderation period, the Great Financial Crisis period and, more generically, periods of bad, normal and good economic growth. The strong and robust performance of this method comes from its ability to disentangle the information aggregated in the original time series of each variable, which allows to isolate the frequencies of the predictors with the highest predictive power from the noisy parts.
    Keywords: predictability, equity risk premium, frequency domain, discrete wavelets
    JEL: C58 G11 G12 G17
    Date: 2016–12
  6. By: Federico Favaretto; Donato Masciandaro
    Abstract: Can the inertia in the monetary policymaking be attributed to psychological drivers? Our model shows two results. First, our baseline model with individual loss aversion explains inertia in a monetary policy committee (MPC) where holds a de jure majority rule. Second, our second model shows that introducing a specication of loss aversion for all members in a MPC leads to inertial decisions when status-quo ination is below the ination target. Conversely when status-quo ination is above the target rate, inertial policy does not occur until the level of ination discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.
    Keywords: Monetary Policy, Behavioral Economics
    JEL: D7 E5
    Date: 2016
  7. By: Stark, Oded; Falniowski, Fryderyk; Jakubek, Marcin
    Abstract: In determining the optimal redistribution of a given population’s income, we ask which factor is more important: the social planner’s aversion to inequality, embedded in an isoelastic social welfare function indexed by a parameter alpha, or the individuals’ concern at having a low relative income, indexed by a parameter beta in a utility function that is a convex combination of (absolute) income and low relative income. Assuming that the redistribution comes at a cost (because only a fraction of a taxed income can be transferred), we find that there exists a critical level of beta below which different isoelastic social planners choose different optimal allocations of incomes. However, if beta is above that critical level, all isoelastic social planners choose the same allocation of incomes because they then find that an equal distribution of incomes maximizes social welfare regardless of the magnitude of alpha.
    Keywords: Maximization of social welfare, Isoelastic social welfare functions, Deadweight loss of tax and transfer, Concern at having a low relative income, Social planners’ aversion to inequality, Political Economy, D31, D60, D63, H21, I38,
    Date: 2016–11
  8. By: Stanislaus Maier-Paape
    Abstract: In this paper the fractional trading ansatz of money management is reconsidered with special attention to chance and risk parts in the goal function of the related optimization problem. By changing the goal function with due regards to other risk measures like current drawdowns, the optimal fraction solutions reflect the needs of risk averse investors better than the original optimal f solution of Ralph Vince. Keywords: fractional trading, optimal f, current drawdown, terminal wealth relative, risk aversion
    Date: 2016–12

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