nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2017‒10‒08
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Nonseparable Multinomial Choice Models in Cross-Section and Panel Data By Victor Chernozhukov; Iv\'an Fern\'andez-Val; Whitney Newey
  2. Time Discounting, Ambiguity Aversion, and Preferences for Future Environmental Policies: Evidence from Discrete Choice Experiments By Kenjiro Hirata; Shinsuke Ikeda; Masako Ikefuji; Myong-Il Kang; Katsunori Yamada
  3. Does Loss Aversion Beat Procrastination ?A Behavioral Health Intervention at the Gym By Oliver März
  4. Pricing sin stocks: Ethical preference vs. risk aversion By Colonnello, Stefano; Curatola, Giuliano; Gioffré, Alessandro
  5. Consumption-Portfolio Choice with Preferences for Cash By Kraft, Holger; Weiss, Farina
  6. Does Time Inconsistency Differ between Gain and Loss? An Intra-Personal Comparison Using a Non-Parametric Designed Experimen By Shotaro Shiba; Kazumi Shimizu
  7. An intertemporal model of growing awareness By Marie-Louise Viero
  8. Choosing Who You Are: The Structure and Behavioral Effects of Revealed Identification Preferences By Hett, Florian; Kröll, Markus; Mechtel, Mario
  9. Paying Gig Workers By Butschek, Sebastian; Kampkötter, Patrick; Sliwka, Dirk
  10. Indifference or indecisiveness: a strict discrimination By Qiu, Jianying; Ong, Qiyan
  11. "A Study on The Behavioural Aspects of Retail Investors for Investment Decision Making in Telangana State" By Jhansi Rani Boda

  1. By: Victor Chernozhukov; Iv\'an Fern\'andez-Val; Whitney Newey
    Abstract: Multinomial choice models are fundamental for empirical modeling of economic choices among discrete alternatives. We analyze identification of binary and multinomial choice models when the choice utilities are nonseparable in observed attributes and multidimensional unobserved heterogeneity with cross-section and panel data. We show that derivatives of choice probabilities with respect to continuous attributes are weighted averages of utility derivatives in cross-section models with exogenous heterogeneity. In the special case of random coefficient models with an independent additive effect, we further characterize that the probability derivative at zero is proportional to the population mean of the coefficients. We extend the identification results to models with endogenous heterogeneity using either a control function or panel data. In time stationary panel models with two periods, we find that differences over time of derivatives of choice probabilities identify utility derivatives "on the diagonal," i.e. when the observed attributes take the same values in the two periods. We also show that time stationarity does not identify structural derivatives "off the diagonal" both in continuous and multinomial choice panel models.
    Date: 2017–06
  2. By: Kenjiro Hirata; Shinsuke Ikeda; Masako Ikefuji; Myong-Il Kang; Katsunori Yamada
    Abstract: Designing efficient environmental policies requires knowledge about households' preference parameters for their intertemporal decisions. By conducting an original Internet-based survey using Japanese participants (n=2,906) and a follow-up survey (n=1,407), we examine how people evaluate pro-environmental policies depending on their individual attributes. The discount rates for environmental outcomes are estimated by using a discrete choice experiment. We show that participants' discount rates in environmental policy choices are on average negative and future-biased. Those who are more ambiguity-averse and patient for money concerns, and anticipate more rapid increases in future temperatures are more willing to incur present-day tax burdens to ensure future environmental improvements. These results are highly robust against alternative estimation models and stable when using the follow-up survey data obtained 21 months later.
    Date: 2017–09
  3. By: Oliver März
    Abstract: Financial incentives are a common tool to encourage overcoming self-control problems and developing beneficial habits. There are different means by which such incentives can be provided, yet, up to date there is little empirical evidence on the relative effectiveness of different incentive designs. In this paper, we conduct a field experiment to explore whether and how incentives that are economically equivalent but framed differently affect the likelihood of exercising at a gym. We find that framing incentives in terms of losses, meaning individuals lose cash incentives by not exercising, encourages more frequent visits to the gym than framing incentives in terms of financial gains. After removing these incentives, we observe habit formation in gym exercise only if incentives were framed as losses rather than gains. The findings are consistent with the concept of loss aversion and suggest that cost reductions and performance improvements can be achieved if opting to frame incentives in terms of losses.
    Keywords: framing; self-control; financial incentives; habit formation; loss aversion
    JEL: C93 D30 I10
    Date: 2017–09
  4. By: Colonnello, Stefano; Curatola, Giuliano; Gioffré, Alessandro
    Abstract: We develop a model that reproduces the return and volatility spread between sin and non-sin stocks, where investors trade off dividends with the ethical assessment of companies. We relax the assumption of boycott behaviour and investigate the role played by the dividend share of sin stocks on their return and volatility spread relative to non-sin stocks. We empirically show that the dividend share predicts a positive return and volatility spread. This pattern is reproduced by our model when dividends and ethicalness are complementary goods and investors are sufficiently risk averse.
    Keywords: asset pricing,general equilibrium,sin stocks
    JEL: D51 D91 E20 G12
    Date: 2017
  5. By: Kraft, Holger; Weiss, Farina
    Abstract: This paper studies a consumption-portfolio problem where money enters the agent's utility function. We solve the corresponding Hamilton-Jacobi-Bellman equation and provide closed-form solutions for the optimal consumption and portfolio strategy both in an infinite- and finite-horizon setting. For the infinite-horizon problem, the optimal stock demand is one particular root of a polynomial. In the finite-horizon case, the optimal stock demand is given by the inverse of the solution to an ordinary differential equation that can be solved explicitly. We also prove verification results showing that the solution to the Bellman equation is indeed the value function of the problem. From an economic point of view, we find that in the finite-horizon case the optimal stock demand is typically decreasing in age, which is in line with rules of thumb given by financial advisers and also with recent empirical evidence.
    Keywords: consumption-portfolio choice,money in the utility function,stock demand,stochastic control
    JEL: G11 C61
    Date: 2017
  6. By: Shotaro Shiba (Graduate School of Economics, Waseda University); Kazumi Shimizu (Department of Political Science and Economics, Waseda University)
    Abstract: Several studies in the time preference literature have found time inconsistencies (TIs) in both the gain and loss domain. However, their relationship within the same person remains unclear: that is, does an individual who demonstrates TI for gain outcomes also do so for loss? To investigate this relationship, we conducted a nonparametric designed experiment that requires only standard axioms and no parametric specification for people’s preferences. In the experiment, we allowed the measurement of TI to depend on character alternatives—such dependency has emerged as a crucial point in recent TI discussions. With these settings, we directly observed TI for gain and loss and found a so-called “future effect” for both outcomes. We also found a positive correlation between the degrees of TI for gain and loss within the same person, irrespective of character alternatives. In addition, in most cases, we found no significant differences between the degrees of TI for gain and loss. These results remained robust even when using another TI measurement. Our findings suggest that people’s TI regarding gain and loss may not differ and the source of TI among individuals is common between their preference for gain and loss.
  7. By: Marie-Louise Viero (Queen's University)
    Abstract: This paper presents an intertemporal model of growing awareness. It provides a framework for analyzing problems with long time horizons in the presence of growing awareness and awareness of unawareness. The framework generalizes both the standard event-tree framework and the framework from Karni and Viero (2017) of awareness of unawareness. Axioms and a representation are provided along with a recursive formulation of intertemporal utility. This allows for tractable and consistent analysis of intertemporal problems with unawareness.
    Keywords: Awareness, Unawareness, Intertemporal Utility, Recursive Utility, Reverse Bayesianism
    JEL: D8 D81 D83 D9
    Date: 2017–09
  8. By: Hett, Florian; Kröll, Markus; Mechtel, Mario
    Abstract: Social identity is an important driver of behavior. But where do difierences in social identity come from? We use a novel laboratory experiment based on a revealed preference approach to analyze how individuals choose their identity. Facing a trade-off between monetary payments and belonging to difierent groups, individuals are willing to forego significant earnings to avoid certain groups and thereby reveal their identification preferences. We then show that these identification preferences are systematically related to behavioral heterogeneity in group-specific social preferences. These results illustrate the importance of identification as a choice and its relevance for explaining individual behavior.
    Keywords: Social Identity,Identification,Social Preferences,Outgroup Discrimination
    JEL: C91 C92 D03
    Date: 2017
  9. By: Butschek, Sebastian; Kampkötter, Patrick; Sliwka, Dirk
    Abstract: We study the compensation of gig workers in a natural field experiment. To derive testable predictions, this paper presents a formal model capturing a central feature of online freelance work: gig work- ers' ability to choose both how much to work and how big an e¤ort to make. We analyse the set-up in a principal-agent model, showing that the optimal contract includes a sales-based commission and uses a gig-based piece rate to insure a risk-averse agent. This piece rate is in- creasing in her risk aversion, intrinsic motivation and ability. We then predict the e¤ects of introducing a gig piece rate while reducing the commission rate. The effects on the agents' choices of quantity and quality are heterogeneous in their risk aversion, intrinsic motivation and ability.
    Keywords: Incentives,Risk Aversion,Intrinsic Motivation,Sales Compensation,Multitasking,Field Experiment
    JEL: M52 J33 D23
    Date: 2017
  10. By: Qiu, Jianying; Ong, Qiyan
    Abstract: We develop a new approach to directly and strictly distinguish indecisiveness from indifference, and study the prevalence and welfare implications of indecisiveness. In our approach experimental subjects face a list of pairs of options. Besides the standard choice of choosing one option out of the pair (the binary choice), we also allow experimental subjects to randomize over the two options by choosing probabilities according to which either option determines the payoffs (the randomized choice). Furthermore, we elicit subjects' willingness to pay (WTP) of using the randomized choice via a modified multiple price list method. We show that subjects might strictly prefer the randomized choice over the binary choice when they are indecisive. Our results suggest that (1) the vast majority of subjects randomized actively; (2) subjects took longer time to make strictly randomized decisions; (3) subjects were willing to pay a strictly positive amount of money to randomize, and they were willing to pay more for choices that they feel more indecisive. These results provide strong evidence for the existence of indecisiveness in choices. More importantly, it suggests that there might exist significant welfare losses when indecisive individuals are forced to make all-or-nothing decisions against their potentially incomplete preferences.
    Keywords: indecisiveness, indifference, experiment, randomized choices
    JEL: C9 C91 D81
    Date: 2017–05–01
  11. By: Jhansi Rani Boda (School of Management, National Institute of Technology, India Author-2-Name: G. Sunitha Author-2-Workplace-Name: School of Management, National Institute of Technology, India Author-3-Name: Parag Ray Author-3-Workplace-Name: School of Management, National Institute of Technology, India)
    Abstract: "Objective – Investment is the commitment of funds which have been saved from the current consumption with an expectation of favorable future returns. Investment behavior is concerned with choices made about the purchase of a significant number of securities for an individual or institutional account. Individual investment behavior is relatively a new area of research in behavioral finance. This study aims to identify the various behavioral patterns of retail investors and their investment decision making in the newly formed Telangana state of India. Methodology/Technique – Data were collected from a sample of 200 retail investors via a structured questionnaire. Factor analysis was then conducted to critically identify the behavioral patterns of the retail investors. Findings – The findings of this study indicate that the two behavioral factors of Heuristics and Prospect have significant impact on the investment decision making attitudes of the retail investors. Novelty – As a newly formed state in India, the Telangana state provides potential investment opportunities for retail as well as institutional investors. It is thus, highly imperative to explore how retail investors make investment decisions especially in the newly formed Telangana State in India"
    Keywords: Behavioral Factors; Behavioral Finance; Investment Behavior; Investment Decision Making; Retail Investor.
    JEL: E22 P25
    Date: 2016–12–21

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.