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on Utility Models and Prospect Theory |
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Issue of 2017‒11‒05
nineteen papers chosen by |
| By: | Tilman Börgers; Yan-Min Choo |
| Abstract: | We consider the aggregation of individual agents’ von Neumann- Morgenstern preferences over lotteries into a social planner’s von Neumann-Morgenstern preference. We start from Harsanyi’s [18] axiomatization of utilitarianism, and ask under which conditions a social preference order that satisfies Harsanyi’s axiom uniquely reveals the planner’s marginal rates of substitution between the probabilities of any two agents’ most preferred alternatives, assuming that any increase/decrease in the probability of each agent’s most preferred alternative is accompanied by an equally sized decrease/increase in that agent’s least preferred alternative. We then introduce three axioms for these revealed marginal rates of substitution. The only welfare function that satisfies these three axioms is the relative utilitarian welfare function. This welfare function, that was introduced in Dhillon [9] and Dhillon and Mertens [11], normalizes all agents’ utility functions so that the lowest value is 0 and the highest value is 1, and then adds up the utility functions. Our three axioms are closely related to axioms that Dhillon and Mertens used to axiomatize relative utilitarianism. We simplify the axioms, provide a much simpler and more transparent derivation of the main result, and re-interpret the axioms as revealed preference axioms. |
| JEL: | D60 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6613&r=upt |
| By: | Masatlioglu, Yusufcan; Nakajima, Daisuke; Ozdenoren, Emre |
| Abstract: | This paper provides a behavioral foundation for the willpower as limited cognitive resource model which bridges the standard utility maximization and the Strotz models. Using the agent's ex ante preferences and ex post choices, we derive a representation that captures key behavioral traits of willpower constrained decision making. We use the model to study the pricing problem of a profit maximizing monopolist who faces consumers with limited willpower. We show that the optimal contract often consists of three alternatives and the consumer's choices reflect a form of the "compromise effect" which is induced endogenously. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12354&r=upt |
| By: | Jonathan Chapman; Mark Dean; Pietro Ortoleva; Erik Snowberg; Colin Camerer |
| Abstract: | An enormous literature documents that willingness to pay (WTP) is less than willingness to accept (WTA) a monetary amount for an object, a phenomenon called the endowment effect. Using data from an incentivized survey of a representative sample of 3,000 U.S. adults, we add one (probably) surprising additional finding: WTA and WTP for a lottery are, at best, slightly correlated. Across all respondents, the correlation is slightly negative. A meta-study of published experiments with university students shows a correlation of around 0.15--0.2, consistent with the correlation in our data for high-IQ respondents. While poorly related to each other, WTA and WTP are closely related to different measures of risk aversion, and relatively stable across time. We show that the endowment effect is not related to individual-level measures of loss aversion, counter to Prospect Theory or Stochastic Reference Dependence. |
| JEL: | C80 D81 D91 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23954&r=upt |
| By: | Arna Olafsson; Michaela Pagel |
| 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 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 (Kőszegi and Rabin, 2009), which assumes individuals experience utility over news or changes in expectations about consumption. |
| JEL: | D14 D90 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23945&r=upt |
| By: | Christoph March; Marco Sahm |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6587&r=upt |
| By: | Dertwinkel-Kalt, Markus; Köster, Mats |
| Abstract: | We show that models of stimulus-driven attention can account for skewness preferences. As unlikely, but outstanding payoffs attract attention, an agent exhibits a preference for right-skewed and an aversion toward left-skewed risks. We show that extreme predictions on skewness preferences by prospect theory can be ruled out for models of stimulus-driven attention. |
| JEL: | D81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168303&r=upt |
| By: | Vasilev, Aleksandar |
| Abstract: | The purpose of this note is to explore the problem of non-convex labor supply decision in an economy with imperfect observability of work e ffort, and the need to use e fficiency wages to prevent shirking as in Shapiro and Stiglitz (1984). In addition, the paper and explicitly performs the aggregation presented in Vasilev (2017) without a formal proof, and thus provide - starting from micro-foundations - the derivation of the expected utility functions used for the aggregate household. We show how lotteries as in Rogerson (1988) can be used to convexify consumption sets, and aggregate over individual preferences. With a discrete labor supply decisions, the elasticity of aggregate labor supply increases from unity to infinity. |
| Keywords: | Aggregation,Indivisible Labor,non-convexities,shirking,efficiency wages |
| JEL: | E1 J22 J41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:170567&r=upt |
| 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. |
| Keywords: | experiment design, robustness, ambiguity aversion, randomization, rerandomization |
| JEL: | C90 D78 D81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6678&r=upt |
| By: | Marianne Andries; Valentin Haddad |
| Abstract: | The main features of households' attention to savings are rationalized by a model of information aversion, a preference-based fear of receiving flows of news. In line with the empirical evidence, information averse investors observe the value of their portfolios infrequently; inattention is more pronounced for more risk averse investors and in periods of low or volatile stock prices. The model also explains how changes in information frequencies affect risk-taking decisions, as observed in the field and the lab. Further, we find that receiving state-dependent alerts following sharp downturns improves welfare, suggesting a role for financial intermediaries as information managers. |
| JEL: | E21 G02 G11 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23958&r=upt |
| By: | Kiyohiko G. Nishimura (Professor of Economics, National Graduate Institute for Policy Studies (GRIPS); Emeritus Professor and Distinguished Project Research Fellow, Center for Advanced Research in Finance (CARF) at the University of Tokyo; Chair, Statistics Commission of Japan; Former Deputy Governor, Bank of Japan); Junko Ishikawa (Researcher, Nomura Research Institute) |
| Abstract: | GDP statistics have been a focus of debates, especially about whether real (constant-price) GDP figures appropriately represent the economic conditions of the economy. This paper shows that the official nominal (current price) GDP is the nominal value of utility the nation enjoys from the current consumption and future consumption that current investment enables to realize in an ideal-type economy with money, which is an intuitive interpretation. However, in this framework, an appropriate real GDP is not the official constant-price GDP but the utility or value GDP, which is the nominal GDP divided by the Consumer Price Index (most broadly defined). |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf424&r=upt |
| By: | Joan Costa-i-Font |
| Abstract: | We examine the presence of a systematic preference for independent living at old age which we refer as “institutionalization aversion” (IA). Given that IA is not observable from revealed preferences, we draw on a survey experiment to elicit individuals’ willingness to pay (WTP) to avoid institutionalization (e.g., in a nursing home), using a double-bounded referendum WTP format. Our results suggest robust evidence of IA and reveal a willingness to pay of up to 16% of respondent’s (individuals over fifty-five years of age) average income. We find that estimates of the willingness to pay to avoid institutionalization (or €292 at the time of the study) exceed the amount respondents are willing to pay for home health care at old age in the event of a mild impairment (€222). WTP estimates vary with income, age and especially, respondents’ housing conditions. Finally, we test the sensitivity of our estimates to anchoring effects and ‘yea-saying’ biases. |
| Keywords: | institutionalisation aversion, state-dependent preferences, home health care, willingness to pay, caregiving, referendum format |
| JEL: | R21 I18 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6703&r=upt |
| By: | Matthew Lorig; Zhou Zhou; Bin Zou |
| Abstract: | In this paper, we study trading strategies based on exponential moving averages (ExpMA), an important indicator in technical analysis. We seek optimal ExpMA strategies when the drift of the underlying is modeled by either an Ornstein-Uhlenbeck process or a two-state continuous-time Markov chain. Closed-form solutions are obtained under the logarithm utility maximization and the long-term growth rate maximization. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1710.09476&r=upt |
| By: | Armin Falk; Anke Becker; Thomas Dohmen; Benjamin Enke; David B. Huffman; Uwe Sunde |
| Abstract: | This paper studies the global variation in economic preferences. For this purpose, we present the Global Preference Survey (GPS), an experimentally validated survey dataset of time preference, risk preference, positive and negative reciprocity, altruism, and trust from 80,000 individuals in 76 countries. The data reveal substantial heterogeneity in preferences across countries, but even larger within-country heterogeneity. Across individuals, preferences vary with age, gender, and cognitive ability, yet these relationships appear partly country specific. At the country level, the data reveal correlations between preferences and bio-geographic and cultural variables such as agricultural suitability, language structure, and religion. Variation in preferences is also correlated with economic outcomes and behaviors. Within countries and subnational regions, preferences are linked to individual savings decisions, labor market choices, and prosocial behaviors. Across countries, preferences vary with aggregate outcomes ranging from per capita income, to entrepreneurial activities, to the frequency of armed conflicts. |
| JEL: | D0 D03 D9 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23943&r=upt |
| By: | Simon Gaechter; Lingbo Huang; Martin Sefton |
| Abstract: | We present an experiment to investigate the source of disappointment aversion in a sequential real-effort competition. Specifically, we study the contribution of social comparison effects to the disappointment aversion previously identified in a two-person real-effort competition (Gill and Prowse, 2012). To do this we compare “social†and “asocial†versions of the Gill and Prowse experiment, where the latter treatment removes the scope for social comparisons. If disappointment aversion simply reflects an asymmetric evaluation of losses and gains we would expect it to survive in our asocial treatment, while if losing to or winning against another person affects the evaluation of losses/gains we would expect treatment differences. We find behavior in social and asocial treatments to be similar, suggesting that social comparisons have little impact in this setting. Unlike in Gill and Prowse we do not find evidence of disappointment aversion. |
| Keywords: | real effort competition, social comparison effects, disappointment aversion, reference-dependent preferences |
| JEL: | C91 D12 D81 D84 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6489&r=upt |
| By: | Kelvin Shuangjian Zhang |
| Abstract: | We generalize the approach of Carlier (2001) and provide an existence proof for the multidimensional screening problem with general nonlinear preferences. We first formulate the principal's problem as a maximization problem with $G$-convexity constraints, and then use $G$-convex analysis to prove existence. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1710.08549&r=upt |
| By: | Susan Athey; Guido Imbens |
| Abstract: | In this review, we present econometric and statistical methods for analyzing randomized experiments. For basic experiments we stress randomization-based inference as opposed to sampling-based inference. In randomization-based inference, uncertainty in estimates arises naturally from the random assignment of the treatments, rather than from hypothesized sampling from a large population. We show how this perspective relates to regression analyses for randomized experiments. We discuss the analyses of stratified, paired, and clustered randomized experiments, and we stress the general efficiency gains from stratification. We also discuss complications in randomized experiments such as non-compliance. In the presence of non-compliance we contrast intention-to-treat analyses with instrumental variables analyses allowing for general treatment effect heterogeneity. We consider in detail estimation and inference for heterogeneous treatment effects in settings with (possibly many) covariates. These methods allow researchers to explore heterogeneity by identifying subpopulations with different treatment effects while maintaining the ability to construct valid confidence intervals. We also discuss optimal assignment to treatment based on covariates in such settings. Finally, we discuss estimation and inference in experiments in settings with interactions between units, both in general network settings and in settings where the population is partitioned into groups with all interactions contained within these groups. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1607.00698&r=upt |
| By: | Torben M. Andersen; Joydeep Bhattacharya |
| Abstract: | Many countries, in an effort to address the problem that too many retirees have too little saved up, impose mandatory contributions into retirement accounts, that too, in an age-independent manner. This is puzzling because such funded pension schemes effectively mandate the young, who wish to borrow, to save for retirement. Further, if agents are present-biased, they disagree with the intent of such schemes and attempt to undo them by reducing their own saving or even borrowing against retirement wealth. We establish a welfare case for mandating the middle-aged and the young to contribute to their retirement accounts, even with age-independent contribution rates. We find, somewhat counterintuitively, that even though the young responds by borrowing more that too at a rate higher than offered by pension savings, their life-time utility increases. |
| Keywords: | present-biased preferences, mandatory pensions, pension offsets, crowding out |
| JEL: | H55 D91 D03 E60 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6577&r=upt |
| By: | Perez Padilla, Mitzi (Tilburg University, School of Economics and Management) |
| Abstract: | This dissertation contains four chapters studying individual preferences and economic decision-making. The first three chapters study preferences for risk taking and intertemporal choice. First, it asks the question whether economic preferences are related to psychological measures of personality and whether they have similar prediction power on financial decisions. Our main finding is that the channels through which personality affect economic behavior is different than those measured by economic preferences. The next two papers ask the following questions: How are financial choices within a household being made? If a household is composed of more than one individual, which family members decide and what influences their decisions? Are individual preferences considered stable over time? These questions are approached by using experimental data and information on actual financial choices such as household portfolio composition and financial wealth. Findings suggest that bargaining power with respect to risky and intertemporal choices is not equally divided within couples. The third essay finds a positive correlation between preferences over time, and no strong evidence for cross-couple effects of economic or health shocks. The last chapter discusses the relationship between social preferences, specifically, trust and trustworthiness and socio-economic status. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:4f97c2b7-a709-4627-96bd-b85aca7ebbdd&r=upt |
| By: | Puppe, Clemens |
| Abstract: | It is proved that, among all restricted preference domains that guarantee consistency (i.e. transitivity) of pairwise majority voting, the single-peaked domain is the only minimally rich and connected domain that contains two completely reversed strict preference orders.This result has a number of corollaries, among other things it implies that a single-crossing (‘order-restricted’) domain can be minimally rich only if it is a subdomain of a single-peaked domain. |
| JEL: | D71 C72 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168068&r=upt |