nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2017‒10‒15
eleven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Decisions under Uncertainty in Social Contexts By Rau, Holger; Müller, Stephan
  2. Transparency aversion and insurance market equilibria By Gemmo, Irina; Browne, Mark J.; Gründl, Helmut
  3. A Theory of Experimenters By Abhijit Banerjee; Sylvain Chassang; Sergio Montero; Erik Snowberg
  4. Multi-Lateral Strategic Bargaining Without Stationarity By Alos-Ferrer, Carlos; Ritzberger, Klaus
  5. An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach By Stark, Oded; Kosiorowski, Grzegorz; Jakubek, Marcin
  6. Large-Scale Portfolio Allocation Under Transaction Costs and Model Uncertainty: Adaptive Mixing of High- and Low-Frequency Information By Hautsch, Nikolaus; Voigt, Stefan
  7. Redonner du contrôle aux usagers : évaluation des effets d’une intervention comportementale sur la réduction du gaspillage en restauration collective By Sebbane, M.; Costa, S.; Sirieix, L.
  8. Ambiguity and Time-Varying Risk Aversion in Sovereign Debt Markets By Grosse Steffen, Christoph; Podstawski, Maximilian
  9. When do reference points update? A field analysis of the effect of prior gains and losses on risk-taking over time By Maximilian Rüdisser; Raphael Flepp; Egon Franck
  10. Cognitive Ability and Bidding Behavior in Second Price Auctions: An Experimental Study By Ji Yong Lee; Rodolfo M. Nayga, Jr; Cary Deck; Andreas Drichoutis
  11. Preference updating in public health risk valuation By Mehmet Kutluay; Roy Brouwer; Richard S. J. Tol

  1. By: Rau, Holger; Müller, Stephan
    Abstract: This paper theoretically and experimentally studies decision-making in risky and social environments. We explore the interdependence of individual risk attitudes and inequality aversion as two decisive behavioral determinants in such contexts. Our model and the data demonstrate that individual risk aversion is attenuated when lagging behind peers, whereas it is amplified under favorable income inequality. People's choices are also are sensitive to their degree of inequality aversion.
    JEL: C91 D03 D63 D81
    Date: 2017
  2. By: Gemmo, Irina; Browne, Mark J.; Gründl, Helmut
    Abstract: Telemonitoring devices can be used to screen consumers' characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. However, some consumers value their privacy and dislike sharing private information with insurers. In the second-best efficient Wilson-Miyazaki-Spence framework, we allow for consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as utilitarian social welfare. Our analysis shows that the choice of information disclosure with respect to revelation of their risk type can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare and a Pareto efficient market allocation. However, if all consumers are offered cross-subsidizing contracts, the introduction of a transparency contract decreases or even eliminates cross-subsidies. Given the prior existence of a WMS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis provides a theoretical foundation for the discussion on consumer protection in the context of digitalization. It shows that new technologies bring new ways to challenge crosssubsidization in insurance markets and stresses the negative externalities that digitalization has on consumers who are not willing to take part in this development.
    Keywords: Adverse Selection,Digitalization,Privacy,Screening,Transparency Aversion
    JEL: D41 D52 D60 D82 G22
    Date: 2017
  3. By: Abhijit Banerjee; Sylvain Chassang; Sergio Montero; Erik Snowberg
    Abstract: This paper proposes a decision-theoretic framework for experiment design. We model experimenters as ambiguity-averse decision-makers, who make trade-offs between subjective expected performance and robustness. This framework accounts for experimenters' preference for randomization, and clarifies the circumstances in which randomization is optimal: when the available sample size is large enough or robustness is an important concern. We illustrate the practical value of such a framework by studying the issue of rerandomization. Rerandomization creates a trade-off between subjective performance and robustness. However, robustness loss grows very slowly with the number of times one randomizes. This argues for rerandomizing in most environments.
    JEL: C90 D81
    Date: 2017–09
  4. By: Alos-Ferrer, Carlos (Department of Economics, University of Cologne); Ritzberger, Klaus (Royal Holloway, University of London)
    Abstract: This paper establishes existence of subgame perfect equilibrium for a general class of sequential multi-lateral bargaining games. The only required hypothesis is that utility functions are continuous on the space of economic outcomes. In particular, no assumption on the space of feasible payoffs is needed. The result covers arbitrary and even time-varying bargaining protocols (acceptance rules), arbitrary specifications of patience or impatience (geometric, hyperbolic, or otherwise), externalities, multiple selves, and other-regarding preferences.
    Keywords: bargaining, equilibrium existence, infinite-horizon games, subgame perfection
    Date: 2017–08
  5. By: Stark, Oded; Kosiorowski, Grzegorz; Jakubek, Marcin
    Abstract: A transfer from a richer individual to a poorer one seems to be the most intuitive and straightforward way of reducing income inequality in a society. However, can such a transfer reduce the welfare of the society? We show that a rich-to-poor transfer can induce a response in the individuals' behaviors which actually exacerbates, rather than reduces, income inequality as measured by the Gini index. We use this result as an input in assessing the social welfare consequence of the transfer. Measuring social welfare by Sen's social welfare function, we show that the transfer reduces social welfare. These two results are possible even for individuals whose utility functions are relatively simple (namely, at most quadratic in all terms) and incorporate a distaste for low relative income. We first present the two results for a population of two individuals. We subsequently provide several generalizations. We show that our argument holds for a population of any size, and that the choice of utility functions which trigger this response is not singular - the results obtain for an open set of the space of admissible utility functions. In addition, we show that a rich-to-poor transfer can exacerbate inequality when we employ Lorenz-domination, and that it can decrease social welfare when we draw on any increasing, Schur-concave welfare function.
    Keywords: A rich-to-poor transfer,Relative income,Sen's social welfare function
    JEL: D30 D31 D60 D63 H21 I38
    Date: 2017
  6. By: Hautsch, Nikolaus; Voigt, Stefan
    Abstract: We propose a Bayesian sequential learning framework for high-dimensional asset al-locations under model ambiguity and parameter uncertainty. The model is estimated via MCMC methods and allows for a wide range of data sources as inputs. Employing the proposed framework on a large set of NASDAQ-listed stocks, we observe that time-varying mixtures of high- and low-frequency based return predictions significantly improve the out-of-sample portfolio performance.
    JEL: C52 C11 C58 G11
    Date: 2017
  7. By: Sebbane, M.; Costa, S.; Sirieix, L.
    Abstract: In this study, The Theory of Planned Behavior (TPB) was used to develop and evaluate a behavioral intervention that aimed to reduce food waste in a worksite cafeteria. Based on a quasi-experimental design, two questionnaires were used to measure the personal motivations of 216 participants, before and after the intervention. Responses were related to observed behaviors and a measure of actual control. Our results validate the effectiveness of the action implemented with a 20% reduction of waste. Moreover, our study supports the utility of TCP in modeling behaviors, but reveals weaknesses in its ability to explain evolutions: in particular, the relationship between the evolution of perceived control and behavior. ....French Abstract: Dans la présente étude, la théorie du comportement planifié (TCP) a été mobilisée afin de mettre en place et évaluer une intervention comportementale visant à réduire le gaspillage alimentaire dans un restaurant d’entreprise. S’appuyant sur un plan quasi-expérimental, deux questionnaires ont permis de mesurer les motivations personnelles de 216 participants, avant et après l’intervention. Les réponses ont été reliées aux comportements observés et à une mesure du contrôle réel. Nos résultats valident l’efficacité de l’action mise en œuvre avec une réduction du gaspillage de l’ordre de 20%. Par ailleurs, notre étude soutient l’utilité de la TCP pour modéliser des comportements, mais font apparaitre des faiblesses dans sa capacité à expliquer des évolutions : en particulier, la relation entre l’évolution du contrôle perçu et du comportement.
    JEL: A13 D12
    Date: 2017
  8. By: Grosse Steffen, Christoph; Podstawski, Maximilian
    Abstract: This paper introduces changes in the level of ambiguity as a complementary source of time-varying risk aversion. We show in a consumption-based asset pricing model with simultaneously risky and ambiguous assets that a rise in the level of ambiguity raises investors' risk aversion. The effect is quantified in an application to European sovereign debt markets using a structural VAR to achieve identification in the data.
    JEL: C32 D80 E43 G01 H63
    Date: 2017
  9. By: Maximilian Rüdisser (Department of Business Administration, University of Zurich); Raphael Flepp (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich)
    Abstract: We study how temporal separations affect recurring decision-making under risk and thus ask when reference points update. Using both experimental and panel data from a casino, we analyze how individual risk-taking behavior during a casino visit depends on the outcomes of temporally separated prior visits. Our results show that small prior gains lead to more risk-averse behavior in the next visit, but small prior losses have no effect on subsequent risk-taking. These results suggest an asymmetric temporal effect of small prior gains and losses, whereby gains affect subsequent choices for longer than losses. Thus, the reference point—which determines subsequent risk-taking behavior—updates much faster after small losses than after small gains. Further, we find that risk-taking greatly depends on the size of prior outcomes. Whereas large prior losses also impact subsequent choices and strongly reduce risk-taking, large prior gains only have a marginal effect, if any.
    Keywords: Decision-making,Risk-taking, Field experiment, Longitudinal data, Casino gambling
    JEL: C23 C93 D81 D90
    Date: 2017–10
  10. By: Ji Yong Lee (Department of Agricultural Economics and Agribusiness,, University of Arkansas); Rodolfo M. Nayga, Jr (The National Bureau of Economic Research); Cary Deck (Department of Economics, Finance, and Legal Studies, University of Alabama); Andreas Drichoutis (Department of Agricultural Economics & Rural Development, Agricultural University of Athens)
    Abstract: Behavioral biases are more pronounced for individuals with lower cognitive abilities. This paper examines what connection if any there is between cognitive ability and bidding strategy in second price auctions. Despite truthful revelation being a weakly dominant strategy, previous experiments have consistently observed overbidding, which makes use of such auctions for inferring homegrown value problematic. Examining the effect of cognitive ability is important as it may help identify when one can reliably recover values from bids. The results indicate that more cognitively able subjects behave in closer accordance with theory, and that cognitive ability partially explains heterogeneity in bidding behavior.
    Keywords: Cognitive ability, Second price auction, Bid deviation, Overbidding, Laboratory experiment
    JEL: C91 C92
    Date: 2017
  11. By: Mehmet Kutluay (Institute for Environmental Studies, Vrije Universiteit, Amsterdam; Tinbergen Institute, Amsterdam/Rotterdam); Roy Brouwer (Department of Economics and The Water Institute, University of Waterloo, Canada; Institute for Environmental Studies, Vrije Universiteit, Amsterdam); Richard S. J. Tol (Institution Department of Economics, University of Sussex; Institute for Environmental Studies, Vrije Universiteit, Amsterdam; Department of Spatial Economics, Vrije Universiteit, Amsterdam; Tinbergen Institute, Amsterdam; CESifo, Munich)
    Abstract: Willingness to pay (WTP) for malaria pills, in light of new risk information and probability weighting, is estimated via a discrete choice experiment (CE). A lottery played prior to the CE yields individual-level probability weighting parameters through Bayesian inference. Over-reaction to new malaria risk information is found as marginal WTP for malaria protection increases by 20-33%. The probability weighting parameter helps to explain the observed variation in malaria valuation, while over or under-weighting of probabilities is found to be correlated with malaria knowledge and experience. This is independent of whether or not the information treatment is received. Over-reaction to new information uncovers potential biases, possibly from simply reminding people about being sick, in placing a monetary value on avoiding uncertain public health risks.
    Keywords: probability weighting, malaria, valuation, information shock, Bayesian inference
    JEL: D83 D90 I12 I18
    Date: 2017–10

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