nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2017‒09‒10
twelve papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Economic rationality under cognitive load By Drichoutis, Andreas C.; Nayga, Rodolfo
  2. Are group members less inequality averse than individual decision makers? By Haoran He; Marie Claire Villeval
  3. A Generalization of the Harsanyi NTU Value to Games with Incomplete Information By Andrés Salamanca
  4. The Ostrich in Us: Selective Attention to Financial Accounts, Income, Spending, and Liquidity By Olafsson, Arna; Pagel, Michaela
  5. PERFORMANCE ANALYSIS OF THE OPTIMAL STRATEGY UNDER PARTIAL INFORMATION By Ahmed Belhadjayed; Grégoire Loeper; Sofiene El Aoud; Frédéric Abergel
  6. Contests as selection mechanisms: The impact of risk aversion By March, Christoph; Sahm, Marco
  7. Axioms for Measuring without mixing apples and Oranges By O'Callaghan, Patrick
  8. A system operator's utility function for the frequency response market By Greve, T.; Teng, F.; Pollitt, M.; Strbac, G.
  9. Bargaining over waiting time in gain and loss framed ultimatum games By Doll, Monika; Seebauer, Michael; Tonn, Maren
  10. Firm Capabilities, Technological Dynamism and Innovation Internationalisation – a Behavioural Approach By Schubert, Torben; Baier, Elisabeth; Rammer, Christian
  11. Hyperbolic discounting and the time-consistent solution of three canonical environmental problems By Strulik, Holger
  12. Decision design and re-ordering preferences: the case of an exploration project in a large firm By Mario Le Glatin; Pascal Le Masson; Benoit Weil

  1. By: Drichoutis, Andreas C.; Nayga, Rodolfo
    Abstract: Economic analysis assumes that consumer behavior can be rationalized by a utility function. Previous research has shown that some decision-making quality can be captured by permanent cognitive ability but has not examined how a temporary load in subjects' working memory can affect economic rationality. In a controlled laboratory experiment, we exogenously vary cognitive load by asking subjects to memorize a number while they undertake an induced budget allocation task (Choi et al., 2007a,b). Using a number of manipulation checks, we verify that cognitive load has adverse affects on subjects' performance in reasoning tasks. However, we find no effect in any of the goodness-of-fit measures that measure consistency of subjects' choices with the Generalized Axiom of Revealed Preferences (GARP), despite having a sample size large enough to detect even small differences between treatments with 80% power. Our finding suggests that researchers need not worry about economic rationality breaking down when subjects are placed under temporary working memory load.
    Keywords: Cognitive load, rationality, revealed preferences, working memory, response times, laboratory experiment
    JEL: C91 D03 D11 D12 G11
    Date: 2017–08–20
  2. By: Haoran He (School of Economics and Business Administration - Beijing Normal University); Marie Claire Villeval (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Etienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We compare inequality aversion in individuals and teams by means of both within- and between-subject experimental designs, and we investigate how teams aggregate individual preferences. We find that team decisions reveal less inequality aversion than individual initial proposals in team decision-making. However, teams are no more selfish than individuals who decide in isolation. Individuals express strategically more inequality aversion in their initial proposals in team decision-making because they anticipate the selfishness of other members. Members with median social preferences drive team decisions. Finally, we show that social image has little influence because guilt and envy are almost similar in anonymous and non-anonymous interactions.
    Keywords: social image,experiment,Team,inequity aversion,preference aggregation
    Date: 2017
  3. By: Andrés Salamanca (TSE - Toulouse School of Economics - Toulouse School of Economics)
    Abstract: In this paper, we introduce a solution concept generalizing the Harsanyi non-transferable utility (NTU) value to cooperative games with incomplete information. The so-defined H-solution is characterized by virtual utility scales that extend the Harsanyi-Shapley fictitious weighted-utility transfer procedure. We construct a three-player cooperative game in which Myerson's [Cooperative games with incomplete information. Int. J. Game Theory, 13, 1984, pp. 69-96] generalization of the Shapley NTU value does not capture some "negative" externality generated by the adverse selection. However, when we explicitly compute the H-solution in this game, it turns out that it prescribes a more intuitive outcome taking into account the informational externality mentioned above.
    Keywords: incomplete information,virtual utility,Cooperative games
    Date: 2016–02–01
  4. By: Olafsson, Arna; Pagel, Michaela
    Abstract: A number of theoretical research papers in micro as well as macroeconomics model and analyze attention but direct empirical evidence remains scarce. This paper investigates the determinants of attention to financial accounts using panel data from a financial management software provider containing daily logins, discretionary spending, income, balances, and credit limits. We find that individuals are considerably more likely to log in because they get paid utilizing exogenous variation in paydays due to weekends and holidays. Beyond looking at the causal effect of income on attention, we examine how attention depends on individual spending, balances, and credit limits \emph{within} individuals' own histories. We find that attention is decreasing in spending and overdrafts and increasing in cash holdings, savings, and liquidity. Moreover, attention jumps discretely when balances change from negative to positive. We argue that our findings cannot be explained by rational theories of inattention. Instead our findings are consistent with Ostrich effects and anticipatory utility as the main motivation for paying attention to financial accounts and thus provide new tests for information- or belief-dependent utility models. Furthermore, we show that some of our findings can be explained by a recent influential one of those models (Koszegi and Rabin, 2009), which assumes individuals experience utility over news or changes in expectations about consumption.
    Keywords: personal finance; rational inattention; Selective attention
    Date: 2017–08
  5. By: Ahmed Belhadjayed (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec); Grégoire Loeper (Monash University); Sofiene El Aoud (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec); Frédéric Abergel (MICS - Mathématiques et Informatique pour la Complexité et les Systèmes - CentraleSupélec, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris)
    Abstract: The question addressed in this paper is the performance of the optimal strategy, and the impact of partial information. The setting we consider is that of a stochastic asset price model where the trend follows an unobservable Ornstein-Uhlenbeck process. We focus on the optimal strategy with a logarithmic utility function under full or partial information. For both cases, we provide the asymptotic expectation and variance of the logarithmic return as functions of the signal-to-noise ratio and of the trend mean reversion speed. Finally, we compare the asymptotic Sharpe ratios of these strategies in order to quantify the loss of performance due to partial information.
    Date: 2017–03–07
  6. By: March, Christoph; Sahm, Marco
    Abstract: We investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two-player Tullock contest. Our theoretical model yields two main predictions: First, an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage. Second, if the prize money is sufficiently large, a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent. In a laboratory experiment we confirm both, the non-monotonic impact and the compensating effect of risk aversion on winning probabilities. Our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests.
    Keywords: Selection Contest,Risk Aversion,Competitive Balance,Gender Gap
    JEL: C72 D72 J31 K41 M51 M52
    Date: 2017
  7. By: O'Callaghan, Patrick
    Abstract: A mixture set is path-connected via a suitable collection of paths, the most common example being a convex set. Yet in many economic settings, there are pairs of prospects that are not connected by a path of mixtures. Consider the thought experiment of von Neumann and Morgenstern involving a glass of milk, a glass of tea and a cup of coffee: we are often asked to choose between convex combinations of milk and tea, yet the same cannot be said of tea and coffee. We introduce partial mixture sets (which need not be path-connected) and provide a formal extension of the well-known axiomatisation of cardinal, linear utility by Herstein and Milnor. We show that partial mixture sets encompass a variety of settings in the literature and present a novel application to cardinal, nonlinear utility on a stochastic process.
    Keywords: Utility, Preferences, mixtures
    JEL: C0 C02 D0 D01
    Date: 2017–09–07
  8. By: Greve, T.; Teng, F.; Pollitt, M.; Strbac, G.
    Abstract: How can the electricity system operator determine the optimal quantity and quality of electricity ancillary services (such as frequency response) to procure in a market increasingly characterized by intermittent renewable electricity generation? The paper presents a system operator's utility function to calculate the exchange rates in monetary values between different frequency response products in the electricity system. We then use the utility function in a two-sided Vickrey-Clarke-Groves (VCG) mechanism combined of two frequency response products 'enhanced and primary' in the context of the system in Great Britain. This mechanism would allow the market to reveal to the system operator the welfare optimal mix of speed of frequency response and quantity to procure. We show that this mechanism is the efficient way to support new faster sources of frequency response, such as could be provided by grid scale batteries.
    Keywords: Utility function, ancillary services, system operator, energy storage, VCG mechanism
    JEL: D44 L94
    Date: 2017–07–10
  9. By: Doll, Monika; Seebauer, Michael; Tonn, Maren
    Abstract: We implement waiting time as a currency in an ultimatum game in an experimental laboratory study. Subjects had to split 60 minutes of waiting time. We analyze bargaining behavior in varying situations connected to waiting time as well as gain and loss framing. Different situations that follow waiting time have no influence on bargaining behavior. Regarding gain and loss framing, we do not find differences in proposers' behavior. Responders show less willingness to wait when the bargaining outcome is framed as a loss compared to being framed as a gain of time. Displaying less willingness to wait, responders show a higher propensity to risk a rejection of the proposers' offers.
    Keywords: Ultimatum Game,Waiting Time,Experimental Currency,Leaving the Laboratory,Framing
    JEL: C91 C70
    Date: 2017
  10. By: Schubert, Torben (CIRCLE, Lund University); Baier, Elisabeth (HWTK, Baden-Baden); Rammer, Christian (ZEW, Mannheim)
    Abstract: We develop a behavioural framework of bounded rational decision-making under uncertainty by which we analyse the effect of technological dynamism in the firm’s environment on its decisions to internationalise innovation. Arguing that the firm’s technological performance lev-el affects its risk-preferences, a key-prediction is that firms with low technological compe-tences will internationalise innovation when faced by technological uncertainty while firms with high competences will withdraw from international innovation. A fully rational absorptive-capacity framework would predict the opposite relationship because it ignores the role of dif-ferential risk-preferences. We test our framework using data from the German Community Innovation Survey (CIS).
    Keywords: innovation internationalisation; speed of technological change; bounded rationality; prospect theory; uncertainty; technological capabilities
    JEL: F21 F23 L22 O32
    Date: 2017–09–01
  11. By: Strulik, Holger
    Abstract: In this paper I propose a time-consistent method of discounting hyperbolically that contains the discount rate implied by Gamma discounting as a special case. I apply the discounting method to three canonical environmental problems: (i) optimal renewable resource use, (ii) the tragedy of the commons, (iii) economic growth and pollution. I then compare results with those for conventional exponential discounting using the normalization that both methods provide the same present value of an infinite constant flow. I show that, irrespective of potentially high initial discount rates, time-consistent hyperbolic discounting leads always to a steady state of maximum yield, or, if the environment enters the utility function, a steady state where the Green Golden Rule applies. While (asymptotic) extinction is a real threat under exponential discounting it is impossible under time-consistent hyperbolic discounting. This result is also confirmed for open access resources. In a model of economic growth and pollution, hyperbolic discounting establishes the Golden Rule of capital accumulation and the Modified Green Golden Rule.
    Keywords: discounting,time-consistency,renewable resource use,property rights,growth,pollution
    JEL: D60 D90 Q20 Q50 Q58 O40
    Date: 2017
  12. By: Mario Le Glatin (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Pascal Le Masson (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Benoit Weil (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Decision theory has been long applied to project management for risk and uncertainty reduction. Among the foundations, the manager is considered following axioms describing his rationality the most prominent ones being transitivity and independence. The order in preferences is not supposed be reversed yet unknowns events of nature, seen as exogenous, may perturb our understanding of the given situation and may require designing new decisions going against decision theories, hence increasing uncertainty. In this paper we show that in an innovation project management, traditional decision making is not able to grasp expansion and generativity phenomena as a manager senses the unknown and endogenises it. To highlight this phenomenon we use Bayesian Nets with Wald's foundations to sense the reordering preferences in an industrial case and the benefits of designing one's playground and being intransitive. The purpose to contribute to the idea theories studying generative processes (design theory) by opposition to optimisation (decision theory) can help extend the underlying logics of innovation management and untangle the tipping point, the necessity to explore/exploit.
    Keywords: Décision Bayésienne,Design Decisions,Théorie de la conception
    Date: 2017–08–21

This nep-upt issue is ©2017 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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