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on Utility Models and Prospect Theory |
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Issue of 2017‒06‒11
twenty-one papers chosen by |
| By: | Diederik Aerts; Suzette Geriente; Catarina Moreira; Sandro Sozzo |
| Abstract: | The Machina thought experiments pose to major non-expected utility models challenges that are similar to those posed by the Ellsberg thought experiments to subjective expected utility theory (SEUT). We test human choices in the `Ellsberg three-color example', confirming typical ambiguity aversion patterns, and the `Machina 50/51 and reflection examples', partially confirming the preferences hypothesized by Machina. Then, we show that a quantum-theoretic framework for decision-making under uncertainty recently elaborated by some of us allows faithful modeling of all data on the Ellsberg and Machina paradox situations. In the quantum-theoretic framework subjective probabilities are represented by quantum probabilities, while quantum state transformations enable representations of ambiguity aversion and subjective attitudes toward it. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1706.02168&r=upt |
| By: | Gosselin, Pierre; Lotz, Aïleen; Wambst, Marc |
| Abstract: | This paper presents an analytical treatment of economic systems with an arbitrary number of agents that keeps track of the systems’ interactions and complexity. The formalism does not seek to aggregate agents: it rather replaces the standard optimization approach by a probabilistic description of the agent’s behavior. This is done in two distinct steps. A first step considers an interaction system involving an arbitrary number of agents, where each agent's utility function is subject to unpredictable shocks. In such a setting, individual optimization problems need not be resolved. Each agent is described by a time-dependent probability distribution centered around its utility optimum. The whole system of agents is thus defined by a composite probability depending on time, agents' interactions, relations of strategic dominations, agents' information sets and expectations. This setting allows for heterogeneous agents with different utility functions, strategic domination relations, heterogeneity of information, etc. This dynamic system is described by a path integral formalism in an abstract space -- the space of the agents' actions -- and is very similar to a statistical physics or quantum mechanics system. We show that this description, applied to the space of agents' actions, reduces to the usual optimization results in simple cases. Compared to the standard optimization, such a description markedly eases the treatment of a system with a small number of agents. It becomes however useless for a large number of agents. In a second step therefore, we show that, for a large number of agents, the previous description is equivalent to a more compact description in terms of field theory. This yields an analytical, although approximate, treatment of the system. This field theory does not model an aggregation of microeconomic systems in the usual sense, but rather describes an environment of a large number of interacting agents. From this description, various phases or equilibria may be retrieved, as well as the individual agents’ behaviors, along with their interaction with the environment. This environment does not necessarily have a unique or stable equilibrium and allows to reconstruct aggregate quantities without reducing the system to mere relations between aggregates. For illustrative purposes, this paper studies several economic models with a large number of agents, some presenting various phases. These are models of consumer/producer agents facing binding constraints, business cycle models, and psycho-economic models of interacting and possibly strategic agents. |
| Keywords: | path integrals; statistical field theory; phase transition; non trivial vacuum; effective action; Green function; correlation functions; business cycle; budget constraint; aggregation; forward-looking behavior; heterogeneous agents; multi-agent model; strategical advantage; interacting agents; psycho-economic models; integrated structures; emergence. |
| JEL: | C02 C60 E00 E1 |
| Date: | 2017–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79488&r=upt |
| By: | Thai Ha-Huy (EPEE - Université d'Evry); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG Business School); Frank Page (Indiana University); Myrna Wooders (Vanderbilt University) |
| Abstract: | We consider an exchange economy with a finite number of assets and a finite number of agents. The utility functions of the agents are concave, strictly increasing and their suprema equal infity. We use weak no-arbitrage prices a la Dana and Le Van [5]. Our main result is: an equilibrium exists if, and only if, their exists a weak no-arbitrage price common to all the agents |
| Keywords: | asset market equilibrium; individually rational attainable allocations; individually rational utility set; no-arbitrage prices; weak no-arbitrage prices; no-arbitrage condition |
| JEL: | C62 D50 D81 D84 G1 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:17023&r=upt |
| By: | Hubert Janos Kiss (Institute of Economics, Research Centre for Economic and Regional Studies and Eötvös Loránd University); Ismael Rodriguez-Lara (Middlesex University London, Department of Economics, Business School); Alfonso Rosa-Garcia (Universidad Catolica de Murcia, Facultad de Ciencias Juridicas y de la Empresa) |
| Abstract: | We provide experimental evidence that panic bank runs occur in the absence of problems with fundamentals and coordination failures among depositors, the two main culprits identified in the literature. Depositors withdraw when they observe that others do so, even when theoretically they should not. Our findings suggest that panic also manifests itself in the beliefs of depositors, who overestimate the probability that a bank run is underway. Loss-aversion has a predictive power on panic behavior, while risk or ambiguity aversion do not. |
| Keywords: | bank runs, beliefs, panic, coordination, observability, loss aversion |
| JEL: | C7 C9 D8 G2 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1710&r=upt |
| By: | Nobuyuki Hanaki (Université Côte d'Azur; GREDEG-CNRS; IUF); Eizo Akiyama (University of Tsukuba, Japan); Ryuichiro Ishikawa (University of Tsukuba, Japan) |
| Abstract: | By how much does the presence of behavioral uncertainty in an experimental asset market reduce subjects' confidence in their price forecasts? An incentivized interval forecast elicitation method is employed to answer this question. Each market consists of six traders, and the value of dividends is known. Two treatments are considered: six human traders (6H), and one human interacting with five computer traders whose behavior is known (1H5C). We find that while the deviation of the initial price forecasts from the fundamental value is significantly smaller in the 1H5C treatment than in the 6H treatment, the average confidence regarding the forecasts is not. We further analyze the relationships between subjects' confidence in their forecasts and their trading behavior, as well as their trading performance, in the 6H treatment. While subjects' high confidence in their short-term forecasts shows a negative correlation with their trading performance, high confidence in their long-term forecasts shows a positive correlation with trading performance. |
| Keywords: | Price forecasts, interval elicitation, experimental asset markets, behavioral uncertainty |
| JEL: | C90 D84 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2017-18&r=upt |
| By: | BAHEL, Eric; SPRUMONT, Yves |
| Abstract: | We model social choices as acts mapping states of nature to (public) outcomes. A social choice function (or SCF) assigns an act to every profile of subjective expected utility preferences over acts. A SCF is strategyproof if no agent ever has an incentive to misrepresent her beliefs about the states of nature or her valuation of the outcomes; it is ex-post efficient if the act selected at any given preference profile picks a Pareto-efficient outcome in every state of nature. We offer a complete characterization of all strategyproof and ex-post efficient SCFs. The chosen act must pick the most preferred outcome of some (possibly different) agent in every state of nature. The set of states in which an agent's top outcome is selected may vary with the reported belief profile; it is the union of all the states assigned to her by a collection of bilaterally dictatorial and bilaterally consensual assignment rules. |
| Keywords: | Social choice under uncertainty; strategyproofness; subjective expected utility; dictatorship; consensuality; bilaterality |
| JEL: | D71 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2017-01&r=upt |
| By: | Filippin, Antonio (University of Milan); Gioia, Francesca (University of Edinburgh) |
| Abstract: | This paper studies if competition affects subsequent risk-taking behaviour by means of a laboratory experiment that manipulates the degree of competitiveness of the environment under equivalent monetary incentives. We find that competition increases risk aversion, especially for males, but not in a significant manner. When conditioning on the outcome, we find that males become significantly more risk averse after losing the tournament than after randomly earning the same low payoff. In contrast, males do not become more risk-seeking after winning the tournament, while females' average risk-taking behaviour is unaffected by tournament participation and outcomes. We interpret our findings in terms of males' reaction to negative outcomes driven by intrinsic motives, such as emotions or a shift in the locus of control from internal to external. |
| Keywords: | competition, risk attitudes, gender |
| JEL: | C81 C91 D81 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10792&r=upt |
| By: | Crosetto, Paolo (Université de Grenoble); Filippin, Antonio (University of Milan) |
| Abstract: | Gender differences in risk attitudes are frequently observed, although recent literature has shown that they are context dependent rather than ubiquitous. In this paper we try to rationalize the hetero-geneity of results investigating experimentally whether the presence of a safe option among the set of alternatives explains why females are more risk averse than males. We manipulate three widely used risk elicitation methods finding that the availability of a safe option causally affects risk attitudes. The presence of a riskless alternative does not entirely explain the gender gap but it has a significant effect in triggering or magnifying (when already present) such differences. Despite the pronounced instability that usually characterizes the measurement of risk preferences, we show estimating a structural model that the effect of a safe option is remarkably stable across tasks. This paper constitutes the first suc-cessful attempt to shed light on the determinants of gender differences in risk attitudes. |
| Keywords: | gender differences, risk attitudes, experiment, safe option |
| JEL: | C81 C91 D81 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10793&r=upt |
| By: | Da Silva, Sergio; De Faveri, Dinorá; Correa, Ana; Matsushita, Raul |
| Abstract: | We evaluate the relationship between social preferences, financial literacy and intertemporal choice in questionnaires distributed to university students. Most respondents perform well on a financial literacy test, and the majority show prosocial value orientation. Older students tend to be more prosocial, but we cannot confirm in our sample that females are more prosocial than males. We cannot confirm, either, that the prosocial are more financially literate than individualists and the competitive. Most respondents do not show hyperbolic discounting, and its incidence abates as both stakes and payoff delays increase. Prosocial participants also reveal to be more patient across the questionnaires. |
| Keywords: | Social preferences, Social Value Orientation, Financial literacy, Intertemporal choice, Hyperbolic discounting, Impatience |
| JEL: | D03 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79535&r=upt |
| By: | Argaw, Bethlehem A.; Maier, Michael F.; Skriabikova, Olga J. |
| Abstract: | Job change is a decision under uncertainty: It is associated with costs whereas the decision is made without full knowledge about future benefits. In order to investigate the relationship between willingness to take risks and job mobility, we first extend a model for on-the-job search with nonwage job characteristics by including heterogeneity in risk attitudes. Second, we empirically test the model's implications showing that individuals who are more risk-averse choose to change their jobs less often than more risk-tolerant individuals. This difference in the job changing behaviour leads to only moderate differences wage growth during early career: Risk-averse individuals tend to have on average higher wage gains from each job change and have obtained higher overall wage growth at the end of the early career phase. |
| Keywords: | risk attitudes,job mobility,wage growth,early career development |
| JEL: | D81 J31 J62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:17023&r=upt |
| By: | Da Silva, Sergio; Da Costa Jr, Newton; Matsushita, Raul; Vieira, Cristiana; Correa, Ana; De Faveri, Dinorá |
| Abstract: | A recent population-wide study for Germany, where credit lines on current accounts are available to 80 percent of the population, finds that overdraft debt is more likely for people who give intuitive but incorrect answers on a cognitive reflection test. This suggests those consumers in debt have poorer cognitive reflection and, thus, lack of self control. The Germany study finds that “surprisingly, the level of income does not play a central role.” Here we discriminate the consumers in terms of their income by considering two experiments. In the first (pilot) experiment we do not discriminate consumers in terms of income and, as result, replicate the Germany study. In a follow-up experiment, which assembles a high-quality sample of high-income consumers, we find debt can no longer be explained by poor cognitive reflection. Apparently, high-income consumers treat debt as mere leverage, as companies do. |
| Keywords: | consumer behavior, consumer indebtedness, debt, overdraft, cognitive reflection |
| JEL: | D03 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79518&r=upt |
| By: | Bernard, Carole; Rheinberger, Christoph; Treich, Nicolas |
| Abstract: | Catastrophe aversion and risk equity are important concepts both in risk management theory and practice. Ralph Keeney (1980) was the first to formally define these concepts. He demonstrated that the two concepts are always in con ict. Yet his result is based on the assumption that individual risks are independent. It has therefore limited relevance for real-world catastrophic events. We extend Keeney's result to dependent risks and derive the conditions under which more equity and more correlation between two risks imply a more catastrophic situation. We then generalize some of the results for multiple correlated risks. |
| Keywords: | risk equity, catastrophe aversion, correlation, dependence structure. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:31745&r=upt |
| By: | Jonathan de Quidt; Johannes Haushofer; Christopher Roth |
| Abstract: | We propose a technique for assessing robustness of behavioral measures and treatment effects to experimenter demand effects. The premise is that by deliberately inducing demand in a structured way we can measure its influence and construct plausible bounds on demand-free behavior. We provide formal restrictions on choice that validate our method, and a Bayesian model that microfounds them. Seven pre-registered experiments with eleven canonical laboratory games and around 19,000 participants demonstrate the technique. We also illustrate how demand sensitivity varies by task, participant pool, gender, real versus hypothetical incentives, and participant attentiveness, and provide both reduced-form and structural analyses of demand effects. |
| JEL: | B41 C91 C92 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23470&r=upt |
| By: | Victor Olkhov |
| Abstract: | This paper models macro financial variables alike to financial fluids with local interactions and describes surface-like waves of Investment and Profits. We regard macro-finance as ensemble of economic agents and use their risk ratings as coordinates on economic space. Aggregations of agent's financial variables with risk coordinates x on economic space define macro financial variables as function of x. We describe evolution and interactions between macro financial variables alike to financial fluids by hydrodynamic-like equations. Minimum and maximum risk grades define most secure and most risky agents respectively. That determines borders of macro-finance domain that is filled by economic agents. Perturbations of agent's risk coordinates near risk borders of macro domain cause disturbances of macro financial variables like Investment and Profits. Such disturbances can generate waves that propagate along risk borders. These waves may exponentially amplify perturbations inside of macro domain and impact financial sustainability. We study simple model Investment and Profits and describe linear approximation of steady state distributions of Investment and Profits on macro-finance domain that fulfill dreams of Investors: "more risks-more Profits". We describe Investment and Profits waves on risk border of economic space alike to surface waves in fluids. We present simple examples that specify waves as possible origin of time fluctuations of macro financial variables. Description of possible steady state distributions of macro financial variables and financial risk waves on economic space could help for better policy-making and managing sustainable macro-finance. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1706.01748&r=upt |
| By: | Yuichiro Ito (Bank of Japan); Yasutaka Takizuka (Bank of Japan); Shigeaki Fujiwara (Bank of Japan) |
| Abstract: | This paper investigates the mechanisms that influence household portfolio selection using Japanese and US household survey data, based on dynamic panel data models. The results show that as the classical portfolio theory indicates, the expected value of excess return on risky assets, market volatility, and relative risk aversion are important factors in household portfolio selection, for both Japanese and US households. Moreover, entry costs such as financial literacy have an indispensable effect, as well as households' various constraints, including liquidity and precautionary saving motives. Next, we examine the difference in household portfolio selection between Japan and the USA to explore the reasons why Japanese households have a cautious investment stance. The results indicate that the difference is partly explained by the differences in the relationships between risks and return in the market along with concerns about the future, but financial literacy and structural factors are also important determinants. This suggests that further improvements in institutional aspects and an increase in financial knowledge, as well as an improvement in market performance and the mitigation of future concerns, are important factors in making investment environments in Japan more attractive. |
| Keywords: | portfolio selection; household survey; dynamic GMM; portfolio selection mechanism; relative risk aversion; financial literacy |
| JEL: | C33 D14 D81 G11 |
| Date: | 2017–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp17e06&r=upt |
| By: | Abigail Barr (School of Economics, University of Nottingham); Trudy Owens (School of Economics, University of Nottingham); Ashira Perera (School of Economics, University of Nottingham) |
| Abstract: | Using a specially designed experiment, we investigate whether and how interdependence in risk exposure i.e., risk taking by some members of a potential risk sharing group affecting not only their own but also their co-members risk exposure, affects both risk taking and ex post sharing. The experimental subjects were Sri Lankan small-holders who face interdependent risk and share when neighbors fall on hard times in everyday life. We find that the Sri Lankan farmers reward socially responsible risk taking and, under some circumstances, punish socially irresponsible risk taking. Their behaviour is consistent with socially responsible risk taking being cost dependent, although, here, the statistical evidence is inconclusive. Finally, social responsibility in risk taking and ex post sharing do not appear to be substitutes, rather, they appear to be co-determined. |
| Keywords: | behavioural experiment; risk-sharing; solidarity |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2017-08&r=upt |
| By: | Da Silva, Sergio; De Faveri, Dinorá; Correa, Ana; Matsushita, Raul |
| Abstract: | We investigate to what extent high-income consumers are less hyperbolic than low-income consumers using a sample of 216 bank customers and 796 undergraduates. We assess whether participants who scored lower on a test of cognitive ability were also those who tended to discount the future hyperbolically. Our problem is then to find whether lower cognitive ability translates into hyperbolic discounting. The students had higher implicit discount rates, i.e. they were more hyperbolic, for both low stakes and high stakes when long delays were involved, a result in line with the literature. The undergraduates tended to be hyperbolic regardless of stake size, whereas the bank customers tended to be hyperbolic only when high stakes were involved. This makes sense, as high-income consumers should be less sensitive to low stakes. The bank clients showed superior cognitive ability and this may explain why their System 2 could be more capable of overriding cognitive biases, such as the present bias. |
| Keywords: | hyperbolic discounting, cognitive ability, high-income consumers, behavioral economics |
| JEL: | D03 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79536&r=upt |
| By: | Engl, Florian (University of Cologne); Riedl, Arno (Maastricht University); Weber, Roberto A. (University of Zurich) |
| Abstract: | Institutions are an important means for fostering prosocial behaviors, but in many contexts their scope is limited and they govern only a subset of all socially desirable acts. We use a laboratory experiment to study how the presence and nature of an institution that enforces prosocial behavior in one domain affects behavior in another domain and whether it also alters prosocial preferences and beliefs about others' behavior. Groups play two identical public good games. We vary whether, for only one game, there is an institution enforcing cooperation and vary also whether the institution is imposed exogenously or arises endogenously through voting. Our results show that the presence of an institution in one game generally enhances cooperation in the other game thus documenting a positive spillover effect. These spillover effects are economically substantial amounting up to 30 to 40 percent of the direct effect of institutions. When the institution is determined endogenously spillover effects get stronger over time, whereas they do not show a trend when it is imposed exogenously. Additional treatments indicate that the main driver of this result is not the endogeneity but the temporal trend of the implemented institution. We also find that institutions of either type enhance prosocial preferences and beliefs about others' prosocial behavior, even toward strangers, suggesting that both factors are drivers of the observed spillover effects. |
| Keywords: | public goods, institutions, spillover effect, social preferences, beliefs |
| JEL: | C92 D02 D72 H41 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10781&r=upt |
| By: | 佐々木, 秀綱 |
| Abstract: | 本稿の目的は，ヒューリスティクスやそれに由来する認知バイアスが交渉者に与える影響について注目した研究の大綱的なレビューを行うことである．既存の知見を整理するに当たって，本稿では特に（a）確証ヒューリスティクスに由来する認知バイアスや，（b）プロスペクト理論，（c）固定パイの誤謬といった問題に焦点を当てている．これらについての研究を概説したうえで，今後の交渉研究の展望を示す．, Negotiation studies have so far advanced insight about individual behaviors in negotiation processes. These researches revealed that negotiators judgement and decision-making are influenced by some heuristics and cognitive biases. In this paper, these findings are reviewed and organized so as to present direction for future researches. Specifically, the author focused (a) confirmation heuristics, (b) prospect theory, and (c) fixed-pie error as major source of cognitive distortion of negotiators. It is also discussed that we need further examination about the influence of other major heuristics and biases on negotiator’s behaviors, and strategies for de-biases． |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hmicwp:214&r=upt |
| By: | Bontems, Philippe; Nauges, Céline |
| Abstract: | We develop a theoretical model that describes risk-averse farmers' decisions when facing production risk due to uncertain weather conditions and when irrigation water can be traded on a market. We focus on the role of initial water allocations granted to irrigated farms at the start of the season. The presence of water markets makes the future water price uncertain and hence the value of initial water allocations uncertain. We analyze the properties of this background risk and study how initial water allocations impact farmers' land allocation decisions between an irrigated crop and a non-irrigated crop, both characterized by random expected net returns. We then extend the model by permitting irrigation water to be traded ex-ante at a known price (forward market). Finally, we illustrate our main theoretical findings using simulations. Assumptions made on the distributions of the random variables were chosen to be representative of the situation of irrigated farms located in the Murray-Darling Basin in Australia, where a water market has been in place for several decades. |
| Keywords: | water markets, risk, agriculture. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31742&r=upt |
| By: | Sauthoff, Saramena; Danne, Michael; Mußhoff, Oliver |
| Abstract: | In order to achieve an environmentally friendly and sustainable energy supply, it is necessary that this goal is supported by society. In different countries worldwide it has been shown that one way consumers want to support the energy transition is by purchasing green electricity. However, few people make the leap from their intention to a buying decision. This study explores parameters that influence whether German consumers decide to switch to a green electricity tariff. We conducted a quota-representative online survey including a discrete choice experiment with 371 private households in Germany in 2016. For the econometric analysis, a generalized multinomial logit model in willingness to pay (WTP) space was employed, enabling the estimation of WTP values to be as realistic as possible. The results show that consumers' decision regarding whether or not to make the switch to green energy is influenced by many underlying drivers, such as the source of green energy, whether a person can outsource the switching process, and a person's attitude towards the renewable energy sources levy that currently exists in Germany. Implications for policy makers and recommendations for the marketing of green energy tariffs are provided. |
| Keywords: | energy transition,green energy,tariff switch,discrete choice experiment,generalised multinomial logit model,WTP space |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:daredp:1707&r=upt |