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on Utility Models and Prospect Theory |
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Issue of 2017‒07‒30
eight papers chosen by |
| By: | Dominique, C-Rene |
| Abstract: | SUMMARY: This note examines how the concept of utility has led neo-classical economists astray. It first briefly reviews the thoughts of the early pioneers who have engaged these economists on the utility trail. It next scrutinizes the requirements imposed on the preference set of the consumer in view of extracting a utility function having anticipative properties. Then it shows how set theory can solve the dynamic exchange process and value determination without any need for a utility function. |
| Keywords: | KEYWORDS: Utility, Preference, Well-Ordered Sets, Ordinal Space, Binary Relation, Order-isomorphism. |
| JEL: | D11 D12 |
| Date: | 2017–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80408&r=upt |
| By: | Harin, Alexander |
| Abstract: | Suppose a random variable takes on values in an interval. The minimal distance between the expectation of the variable and the nearest boundary of the interval is considered in the present article. A question whether this distance can be neglected with respect to the standard deviation is analyzed as the main item. This minimal distance can determine the minimal magnitudes of non-zero forbidden zones and biases caused by noise for results of experiments. These non-zero forbidden zones and biases cause fundamental problems, especially in interpretations of experiments in behavioral economics and decision sciences. |
| Keywords: | utility theory; prospect theory; behavioral economics; decision sciences; probability; experiments; data; variance; expectation; noise; |
| JEL: | C1 C81 C9 D8 D81 |
| Date: | 2017–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80319&r=upt |
| By: | Rene J.R. van den Brink (Vrije Universiteit Amsterdam; Tinbergen Institute, The Netherlands); Agnieszka Rusinowska (Paris School of Economics -- CNRS, University Paris 1) |
| Abstract: | In this paper, we connect the social network theory on centrality measures to the economic theory of preferences and utility. Using the fact that networks form a special class of cooperative TU-games, we provide a foundation for the degree measure as a von Neumann-Morgenstern expected utility function reflecting preferences over being in different positions in different networks. The famous degree measure assigns to every position in a weighted network the sum of the weights of all links with its neighbours. A crucial property of a preference relation over network positions is neutrality to ordinary risk. If a preference relation over network positions satisfies this property and some regularity properties, then it must be represented by a utility function that is a multiple of the degree centrality measure. We show this in three steps. First, we characterize the degree measure as a centrality measure for weighted networks using four natural axioms. Second, we relate these network centrality axioms to properties of preference relations over positions in networks. Third, we show that the expected utility function is equal to a multiple of the degree measure if and only if it represents a regular preference relation that is neutral to ordinary risk. Similarly, we characterize a class of affine combinations of the outdegree and indegree measure in weighted directed networks and deliver its interpretation as a von Neumann-Morgenstern expected utility function. |
| Keywords: | Weighted network; network centrality; utility function; degree centrality; von Neumann-Morgenstern expected utility function; cooperative TU-game; weighted directed network. |
| JEL: | D81 D85 C02 |
| Date: | 2017–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170065&r=upt |
| By: | Srecko Zimic (European Central Bank); Romanos Priftis (European Commission) |
| Abstract: | We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:294&r=upt |
| By: | Pau Pujolas (McMaster University); Wyatt Brooks (University of Notre Dame) |
| Abstract: | In constant elasticity of substitution (CES) trade models, the elasticity of import intensity to trade costs is constant while in non-CES models, it is a function. We provide a general formula for this function without making functional form assumptions on the utility function and allowing for quite general production environments. We show how to use the formula to measure welfare gains and to compare them between CES and non-CES models. In a quantitative application we nd that more closed countries and countries with similar patterns of production and consumption across sectors have gains larger than those implied by CES models. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:268&r=upt |
| By: | Lorenzo Bretscher (London School of Economics); Alex Hsu (Georgia Institute of Technology); Andrea Tamoni (London School of Economics) |
| Abstract: | We estimate a New-Keynesian model with heterogeneous agents to study the impact of level and volatility shocks to fiscal policy on the term structure of interest rates and bond risk premia. We derive three key insights from the theoretical model. First, government spending level shocks generate positive covariance between marginal utility to consume and inflation, making nominal bonds poor hedges against consumption risk and result in positive risk premium. Second, variability in the nominal term premium is caused by variation in the real term premium while inflation risk premium is remarkably stable over time. Fluctuation of the real term premium is entirely driven by government spending volatility shocks. Third, at the zero lower bound (ZLB), impact of level and volatility shocks to government spending are amplified. This is especially pronounced for volatility shocks producing substantial bond risk premium when the ZLB is binding. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:258&r=upt |
| By: | Lionel DE BOISDEFFRE |
| Abstract: | We consider a pure exchange economy, where agents, possibly asymmetrically informed, exchange on spot markets and on incomplete financial markets, with no model of how future prices are determined, and keep private their own characteristics, anticipations and beliefs. We show they face an incompressible uncertainty, represented by a so-called "minimum uncertainty set", which typically adds to the exogenous uncertainty, on tomorrow's state of nature, an endogenous uncertainty on tomorrow's possible spot prices, depending on all agents' private beliefs today. At equilibrium, all consumers expect the 'true' price, in each realizable state, as a possible outcome, and elect optimal strategies, ex ante, which clear markets, ex post. Our main Theorem states that a sequential equilibrium exists, in this model, under standard conditions, as long as agents' prior anticipations, which may be refined from observing markets, embed the minimum uncertainty set. This claim is stronger than the classical generic existence result, which followed Hart (1975) and Radner (1979), based on the rational expectations of equilibrium prices. |
| Keywords: | Sequential equilibrium, Temporary equilibrium, Perfect foresight, Existence, Rational expectations, Financial markets, Asymmetric information, Arbitrage |
| JEL: | D52 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:tac:wpaper:2016-2017_9&r=upt |
| By: | Berkhouch, Mohammed; Lakhnati, Ghizlane |
| Abstract: | The main of this paper is to introduce a family of risk measures which generalizes the Gini-type measures of risk and variability, by taking into consideration the psychological behavior. Our risk measures family is coherent and catches variability with respect to the decision-maker attitude towards risk. |
| Keywords: | risk measure, variability measure, risk aversion, signed Choquet integral, Extended Gini Shortfall |
| JEL: | C6 G10 |
| Date: | 2017–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80329&r=upt |