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on Utility Models and Prospect Theory |
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Issue of 2017‒03‒12
ten papers chosen by |
| By: | Takashi Hayashi; Michele Lombardi |
| Abstract: | This paper aims to address two issues related to simultaneous aggregation of utilities and beliefs. The Örst one is related to how to integrate both inequality and uncertainty considerations into social decision-making. The second one is related to how individuals should be responsible for their own beliefs. To accomplish this, whereas individuals are assumed to abide by Savage modelís of subjective expected utility, society is assumed to prescribe, either to each individual when the ex ante individual well-being is favored or to itself when the ex post individual well-being is favored, acting in accordance with the maximin expected utility theory of Gilboa and Schmeidler (1989). Furthermore, it adapts an ex ante Pareto-type condition proposed by Gayer et al. (2014), which says that a prospect Pareto dominates another one if the former gives a higher expected utility than the latter one, for each individual, for all individualsíbeliefs. In the context where the ex ante individual welfare is favored, our ex ante Pareto-type condition is shown to be equivalent to social utility taking the form of a MaxMinMin social welfare function, as well as to the individual set of priors being contained within the range of individual beliefs. However, when the ex post individual welfare is favored, the same Pareto-type condition is shown to be equivalent to social utility taking the form of a MaxMinMin social welfare function, as well as to the social set of priors containing only weighted averages of individual beliefs. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2016_19&r=upt |
| By: | Hirbod Assa (Institute for Financial and Actuarial Mathematics and Institute for Risk and Uncertainty, University of Liverpool, Center for Doctoral Training, Chadwick Building, Liverpool, UK); Alexander Zimper (Department of Economics, University of Pretoria, South Africa, and Kiel Institute for the World Economy, Germany) |
| Abstract: | We consider preferences over all random variables on a given nonatomic probability space. We show that non-trivial and complete preferences cannot simultaneously satisfy the two fundamental principles of convexity and continuity. As an implication of this incompatibility result there cannot exist any non-trivial continuous utility representations over all random variables that are either quasi-concave or quasi-convex. This rules out risk-averse (or seeking) expected utility representations and, more generally, risk- and uncertainty-averse (or seeking) Choquet expected utility representations for this large space of random variables. |
| Keywords: | Large Space, Preference for Diversification, Utility Representation, Risk Measures |
| JEL: | D81 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201714&r=upt |
| By: | Cagala, Tobias |
| Abstract: | In choice under risk, differences between alternative states of the world render choice environments complex. Moreover, they entail powerful experiences of loss if satisfaction falls short of prospective states that did not materialize. An increase in complexity, i.e. a larger number of differences, can have ambiguous effects on loss aversion. Complexity can direct the decision maker's attention to prospective experiences of loss but also requires a higher cognitive effort of weighting and comparing satisfaction in all states. This paper investigates empirically how loss aversion interacts with complexity. Structural estimates of preference parameters indicate an inverse-U shaped relationship between complexity and the weight of expected gain-loss utility in choice under risk. |
| JEL: | C91 D81 D84 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145488&r=upt |
| By: | Samuel Drapeau; Peng Luo; Dewen Xiong |
| Abstract: | We characterize a class of fully coupled forward backward stochastic differential equations in terms of optimal maximal sub-solutions of BSDEs. We present the application thereof in utility optimization with random endowment under probability and discounting uncertainty. We provide some explicit examples and show how to quantify the costs of incompleteness when using utility indifference pricing. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1703.02694&r=upt |
| By: | Qin, CZ; Shubik, M |
| Abstract: | © 2015. A linkage to reconcile measurable utility derived from intensity comparisons or from probability mixtures is provided in this note. This brief note is in honor of Lloyd Shapley whose relatively unknown seminal paper on measurable utility from axioms involving the fineness of perception offered a different view on utility measurement. |
| Date: | 2015–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsbrw:qt79j931v8&r=upt |
| By: | Steeve Marchand; Maria Adelaida Lopera |
| Abstract: | We study how social interactions influence entrepreneurs' attitudes toward risk. We conduct two risk-taking experiments within workshops organized for young Ugandan entrepreneurs. Between the two experiments, the entrepreneurs participate in a networking activity where they build relationships and discuss with each other. We collect detailed data on peer network formation and on participants' choices before and after the networking activity. Our design implicitly controls for homophily effects (i.e. the tendency of individuals to develop relationships with people who have similar characteristics). We find that risk aversion is affected by social conformity. Participants tend to become more (less) risk averse in the second experiment if the peers they discuss with are on average more (less) risk averse in the first experiment. This suggests that social interactions play a role in shaping risk preferences. |
| Keywords: | preference, risk aversion, entrepreneur, social norms |
| JEL: | D03 D81 M13 Z13 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:crrecr:1703&r=upt |
| By: | Zubanov, Nick (University of Konstanz); Cadsby, Bram (University of Guelph); Song, Fei (Ryerson University) |
| Abstract: | We present a model and an experiment that show, in a very general setting, that effort choice under a given linear pay-for-performance contract depends on how the financial risk associated with the scheme interacts with effort. We find that, under a given contract, if risk increases with effort, risk-averse (loving) individuals exert less (more) effort. In contrast, when risk is independent of effort, risk preferences do not affect effort choice. Our findings complement the larger literature on selection into incentive pay by showing that lower effort exerted by the risk-averse under a given incentive contract is another type of behaviour toward risk. |
| Keywords: | incentives, effort, risk aversion |
| JEL: | M52 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10542&r=upt |
| By: | Fausto, Cavalli; Mario, Gilli; Ahmad, Naimzada; |
| Abstract: | The purpose of this paper is to propose a symmetric two player general contest model in order to study the relationship between equilibria and crucial structural parameters of the model. In particular, given a general specification of the players’ set of possible entries, of the agents’ utility functions, and of the rules that presides over outcomes, we aim to analyze the characteristics of the set of equilibria as a function of structural characteristics of the contest technology and of the outcome function. Focusing on three main cases, we study the effect of introducing spillover in the marginal productivity of agents’ efforts and in the polarization between agents’ goals. Firstly, we show that without spillover the equilibrium efforts’ intensity is uniquely connected to the ratio between marginal productivity of effort and polarization. Secondly, we are able to connect existence of multiple symmetric and asymmetric equilibria to the intensity of spillover effects into outcomes. Finally, we show that spillover in contest technology can imply the non-existence of equilibria. |
| Keywords: | symmetric contest, multiple equilibria, symmetric and asymmetric equilibria |
| JEL: | C72 D72 D74 |
| Date: | 2017–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:364&r=upt |
| By: | Cheung, Stephen L. (University of Sydney); Johnstone, Lachlan (University of Sydney) |
| Abstract: | We report an experiment that infers true overconfidence in relative ability through actions, as opposed to reported beliefs. Subjects choose how to invest earnings from a skill task when the returns depend solely upon risk, or both risk and relative placement, enabling joint estimation of individual risk preferences and implied subjective beliefs of placing in the top half. We find evidence of aggregate overconfidence only in a treatment that receives minimal feedback on performance in a trial task. In treatments that receive more detailed feedback, aggregate overconfidence is not observed although identifiable segments of overand underconfident individuals persist. |
| Keywords: | true overconfidence, overplacement, subjective beliefs, joint estimation |
| JEL: | C91 D03 D81 D83 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10545&r=upt |
| By: | Achim Voss (University of Hamburg); Mark Schopf (University of Paderborn) |
| Abstract: | The article compares two models of lobby influence on policy choice: The Grossman & Helpman (1994) contribution-schedule model and a negotiation between the lobbies and the government summarized by a Nash-bargaining function. The literature uses the models interchangeably because they imply the same equilibrium policy. We derive under which conditions they lead to the same payments, equilibrium utilities, and total efficiency. They coincide under particular assumptions about bargaining power and disagreement utility. |
| Keywords: | Nash Bargaining; Common-Agency Model; Lobbying |
| JEL: | C71 C78 D72 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:dispap:27&r=upt |