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on Utility Models and Prospect Theory |
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Issue of 2017‒08‒13
eleven papers chosen by |
| By: | Larry G. Epstein; Shaolin Ji |
| Abstract: | We consider the dynamics of learning under ambiguity when learning is costly and is chosen optimally. The setting is Ellsberg's two-urn thought experiment modified by allowing the agent to postpone her choice between bets so that she can learn about the composition of the ambiguous urn. Signals are modeled by a diffusion process whose drift is equal to the true bias of the ambiguous urn and they are observed at a constant cost per unit time. The resulting optimal stopping problem is solved and the effect of ambiguity on the extent of learning is determined. It is shown that rejection of learning opportunities can be optimal for an ambiguity averse agent even given a small cost. |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1708.01890&r=upt |
| By: | Mayumi Horie (Hiroshima University of Economics) |
| Abstract: | This paper proposes the weaker axioms which admit a cardinal utility representation under ambiguity separating ambiguous beliefs and utility over consequences in a purely subjective setting. The representation is obtained in an implicit form, which corresponds to the disappointment aversion utility (Gul, 1991) with respect to a nonadditive measure in place of a probability measure. It includes all the properties of cardinality, ambiguity aversion, reference dependency, gain/loss asymmetry, and the distortion in probability evaluations. It enables us to capture varying attitude toward ambiguity such as the subjective common ratio e?ect and to explain Machina?s examples (2009, 2014) in the simplest way. |
| Keywords: | isometry, implicit representation, biseparable preference, rank dependent utility, disappointment aversion, common ratio effect |
| JEL: | D81 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:972&r=upt |
| By: | Akay, Alpaslan (University of Gothenburg); Bargain, Olivier (Aix-Marseille University); Jara, Xavier (KU Leuven) |
| Abstract: | Subjective well-being (SWB) data is increasingly used to perform welfare analyses. Interpreted as 'experienced utility', SWB has recently been compared to 'decision utility' using specific experiments, most often based on stated preferences. Results point to an overall congruence between these two types of welfare measures. We question whether these findings hold in the more general framework of non-experimental and large-scale data, i.e. the setting commonly used for policy analysis. For individuals in the British household panel, we compare the ordinal preferences either "revealed" from their labor supply decisions or elicited from their reported SWB. The results show striking similarities on average, reflecting the fact that a majority of individuals made decisions that are consistent with SWB maximization. Differences between the two welfare measures arise for particular subgroups, lending themselves to intuitive explanations that we illustrate for specific factors (health and labor market constraints, 'focusing illusion', aspirations). |
| Keywords: | decision utility, experienced utility, labor supply, subjective well-being |
| JEL: | C90 I31 J22 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10907&r=upt |
| By: | Michel beine (CREA, Université du Luxembourg); Marco Delogu (CREA, Université du Luxembourg); Lionel Ragot (Université Paris Nanterre) |
| Abstract: | This paper studies the determinants of international students' mobility at the university level, for using specifically on the role of tuition fees. We derive a gravity model from a Random Utility Maximization model of location choice for international students in the presence of capacity constraints of the hosting institutions. The last layer of the model is estimated using new data on student migration flows at the university level for Italy. We control for the potential endogeneity of tuition fees through a classical IV approach based on the status of the university. We obtain evidence for a clear and negative effect of fees on international student mobility and confirm the positive impact of the quality of the education. The estimations also support the important role of additional destination-specific variables such as host capacity, the expected return of education and the cost of living in the vicinity of the university. |
| Keywords: | Foreign students; Tuition fees; Location choice; University Quality |
| JEL: | F22 H52 I23 O15 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:17-09&r=upt |
| By: | Strobl, Renate (University of Basel); Wunsch, Conny (University of Basel) |
| Abstract: | In this study we experimentally investigate whether solidarity, which is a crucial base for informal insurance arrangements in developing countries, is sensitive to the extent to which individuals can influence their risk exposure. With slum dwellers of Nairobi our design measures subjects' willingness to share income with a worse-off partner both in a setting where participants could either deliberately choose or were randomly assigned to a safe or a risky project. We find that when risk exposure is a choice, willingness to give is roughly 9 percentage points lower compared to when it is exogenously assigned to subjects. The reduction of solidarity is driven by a change in giving behaviour of persons with the risky project. Compared to their counterparts in the random treatment, voluntary risk takers are seemingly less motivated to share their high payoff with their partner, especially if this person failed after choosing the risky project. This suggests that the willingness to show solidarity is influenced by both the desire for own compensation and attributions of responsibility. Our findings have important implications for policies that interact with existing informal insurance arrangements. |
| Keywords: | solidarity, risk taking, Kenya |
| JEL: | D81 C91 O12 D63 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10906&r=upt |
| By: | Rosa Ferrer; Helena Perrone |
| Abstract: | Using an ideal setting from a major food safety crisis, we estimate a full demand model for the unsafe product and its substitutes and recover consumers’ preference parameters. Counterfactual exercises quantify the relevance of different mechanisms –changes in safety perceptions, idiosyncratic tastes, nutritional characteristics, and prices–driving consumers’ response. We find that consumers’ reaction is limited by their taste for the product and its nutritional characteristics. Due to the costs associated with switching away from the affected product, the decline in demand following a product-harm crisis tends to understate the true weight of such events in consumers’ utility. Indeed, we find that a large fraction of consumers are unresponsive to the crisis even when they significantly downgrade their product safety perception. For an accurate assessment of the crisis, managerial strategies should therefore account for how different demand drivers bind consumers’ substitution patterns. |
| Keywords: | food safety, demand estimation, scanner data, idiosyncratic utility parameters, nutritional preferences |
| JEL: | L51 L66 K13 M3 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:975&r=upt |
| By: | Frank N. Caliendo; Aspen Gorry; Sita Slavov |
| Abstract: | Nearly all life-cycle models adopt Yaari's (1965) assumption that individuals know the survival probabilities that they face. Given that an individual's exact survival probabilities are likely unknown, we explore the implications of relaxing this assumption. If there is no annuity market, then the welfare cost of survival ambiguity is large and regressive. Individuals would pay as much as 1% of total lifetime consumption for immediate resolution of ambiguity and the bottom income quintile is 4 times worse off than the top quintile. Alternatively, with the availability of competitive annuity contracts, survival ambiguity is welfare improving because it allows competitive insurance companies to pool risk across survival types. Even though Social Security and annuities share some properties, Social Security does not help to hedge survival ambiguity. |
| JEL: | D80 D91 H55 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23648&r=upt |
| By: | Akay, Alpaslan (University of Gothenburg); Bargain, Olivier (Aix-Marseille University); Jara, Xavier (KU Leuven) |
| Abstract: | Multidimensional welfare analysis has recently been revived by money-metric measures based on explicit fairness principles and the respect of individual preferences. To operationalize this approach, preference heterogeneity can be inferred from the observation of individual choices (revealed preferences) or from self-declared satisfaction following these choices (subjective well-being). We question whether using one or the other method makes a difference for welfare analysis based on income-leisure preferences. We estimate ordinal preferences that are either consistent with actual labor supply decisions or with income- leisure satisfaction. For different ethical priors regarding work preferences, we compare the welfare rankings obtained with both methods. The correlation in welfare ranks is high in general and very high for the 60% of the population whose actual choices coincide with subjective well-being maximization. For the rest, most of the discrepancies seem to be explained by labor market constraints among the low skilled and underemployment among low-educated single mothers. Importantly from a Rawlsian perspective, the identification of the worst o¤ depends on ethical views regarding responsibility for work preferences and the extent to which actual choices are constrained on the labor market. |
| Keywords: | fair allocation, money metric, decision utility, experienced utility, labor supply, subjective well-being |
| JEL: | C35 C90 D60 D63 D71 H24 H31 J22 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp10908&r=upt |
| By: | Andrew Caplin; Mark Dean; John Leahy |
| Abstract: | We provide a full behavioral characterization of the standard Shannon model of rational inattention. The key axiom is "Invariance under Compression", which identifies this model as capturing an ideal form of attention-constrained choice. We introduce tractable generalizations that allow for many of the known behavioral violations from this ideal, including asymmetries and complementarities in learning, context effects, and low responsiveness to incentives. We provide an even more general method of recovering attention costs from behavioral data. The data set in which we characterize all behavioral patterns is "state dependent" stochastic choice data. |
| JEL: | D8 D83 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23652&r=upt |
| By: | Laurens Cherchye; Thomas Demuynck; Bram De Rock; Frederic Vermeulen |
| Abstract: | We show that transferable utility has no nonparametrically testable implications for marriage stability in settings with a single consumption observation per household and heterogeneous individual preferences across households. This completes the results of Cherchye, Demuynck, De Rock, and Vermeulen (2017), who characterized Pareto efficient household consumption under the assumption of marriage stability without transferable utility. First, we show that the nonparametric testable conditions established by these authors are not only necessary but also sufficient for rationalizability by a stable marriage matching. Next, we demonstrate that exactly the same testable implications hold with and without transferable utility between household members. We build on this last result to provide a primal and dual linear programming characterization of a stable matching allocation for the observational setting at hand. This provides an explicit specification of the marital surplus function rationalizing the observed matching behavior. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:588222&r=upt |
| By: | Chang Wang; Dries Goossens; Martina Vandebroek |
| Abstract: | In the past decade, television broadcasters have been investing a huge amount of money for the Belgian Pro League broadcasting rights. These companies pursue an audience rating maximization, which depends heavily on the schedule of the league matches. At the same time, clubs try to maximize their home attendance and find themselves affected by the schedule as well. Our paper aims to capture the Belgian soccer fans’ preferences with respect to scheduling options, both for watching matches on TV and in the stadium. We carried out a discrete choice experiment using an online survey questionnaire distributed on a national scale. The choice sets are based on three match characteristics: month, kickoff time, and quality of the opponent. The first part of this survey concerns television broadcasting aspects. The second part includes questions about stadium attendance. The choice data is first analyzed with a conditional logit model which assumes homogenous preferences. Then a mixed logit model is fit to model the heterogeneity among the fans. The estimates are used to calculate the expected utility of watching a Belgian Pro League match for every possible setting, either on TV or in the stadium. These predictions are validated in terms of the real audience rating and home attendance data. Our results can be used to improve the scheduling process of the Belgian Pro League in order to persuade more fans to watch the matches on TV or in a stadium. |
| Keywords: | Audience ratings, Belgian soccer, Conditional logit model, Discrete choice experiment, Mixed logit model, Schedule, Stadium attendance |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:ete:kbiper:588528&r=upt |