
on Utility Models and Prospect Theory 
Issue of 2017‒11‒19
sixteen papers chosen by 
By:  Adena, Maja (WZB); Huck, Steffen (WZB); Rasul, Imran (UCL) 
Abstract:  We present evidence from a natural field experiment designed to shed light on whether individual behavior is consistent with a neoclassical model of utility maximization subject to budget constraints. We do this through the lens of a field experiment on charitable giving. We find that the behavior of at least 80% of individuals, on both the extensive and intensive margins, can be rationalized within a standard neoclassical choice model in which individuals have preferences, defined over own consumption and their contribution towards the charitable good, satisfying the axioms of revealed preference. 
Keywords:  natural field experiment; revealed preference; 
JEL:  C93 D01 D12 D64 
Date:  2017–11–02 
URL:  http://d.repec.org/n?u=RePEc:rco:dpaper:54&r=upt 
By:  Mehrmann, Annika; SurethSloane, Caren 
Abstract:  We investigate how tax loss offset restrictions affect an investor's evaluation of risky investments under bounded rationality. We analytically identify behavioral tax effects for different levels of loss offset restrictions, tax rate and prospect theoretical biases (loss aversion, probability weighting and reference dependence) and find tax loss offset restrictions significantly bias investor perception, even more heavily than the tax rate. If loss offset restrictions are rather generous, investors are very loss averse or assign a huge weight to loss probabilities, taxation is likely to increase the preference value of risky investments (behavioral tax paradox). Surprisingly, the identified significant perception biases of tax loss offset restrictions occur under both high and low tax rates and thus are relatively insensitive to tax rate changes. Finally, we identify huge differences in behavioral tax effects across countries indicating that tax loss offset restrictions crucially determine the perceived tax quality of a country for risky investments. Our analysis is relevant for policy makers discussing future tax reforms as well as for investors assessing risky investment opportunities. 
Keywords:  asymmetric taxation,investment decisions,loss offset restrictions,perception bias,risktaking,tax effects,tax losses,prospect theory,behavioral taxation 
JEL:  D81 D91 H21 H25 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:zbw:arqudp:222&r=upt 
By:  Guilhem Lecouteux (Université Côte d'Azur; GREDEG CNRS) 
Abstract:  Bayesian game theorists claim to represent players as Bayes rational agents, maximising their expected utility given their beliefs about the choices of other players. I argue that this narrative is inconsistent with the formal structure of Bayesian game theory. This is because (i) the assumption of common belief in rationality is equivalent to equilibrium play, as in classical game theory, and (ii) the players' prior beliefs are a mere mathematical artefact and not actual beliefs hold by the players. Bayesian game theory is thus a Bayesian representation of the choice of players who are committed to play equilibrium strategy profiles. 
Keywords:  Bayesianism, common belief in rationality, epistemic game theory, interactive epistemology, prior beliefs 
JEL:  B21 C72 D81 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:gre:wpaper:201730&r=upt 
By:  Marco Sahm 
Abstract:  I examine the impact of risk preferences on efforts and winning probabilities in generalised Tullock contests between two players. The theoretical analysis yields two main results. First, I specify a sufficient condition on the agentsâ€™ comparative prudence under which a higher common level of risk aversion leads to lower aggregate effort in symmetric contests. Second, I show that for a certain range of parameters in asymmetric contests, higher riskaversion will be a disadvantage if the agent is comparatively prudent. 
Keywords:  Tullock contest, risk aversion, prudence 
JEL:  C72 D72 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_6417&r=upt 
By:  Morone, Andrea; Temerario, Tiziana; Nemore, Francesco 
Abstract:  In this paper we investigated group size impact on risk aversion when a majority rule is applied. Drawing on the widely used Holt and Laury’s (2002) lottery pairs, we observed a risky shift for both individual and groups regardless of their size. However, groups choices are shown to be closer to the riskneutrality prediction. More interestingly, whereas smaller groups attitudes can be safely approximated by individual choices, larger groups reveal a statistically different riskloving attitude. This risky shift becomes more prominent as group size increases. 
Keywords:  Preferences; Group; Risk Attitude; Majority Rule; Laboratory. 
JEL:  C91 C92 D1 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:82453&r=upt 
By:  Philipp Renner; Karl Schmedders 
Abstract:  This paper contributes to the theoretical and numerical analysis of discrete time dynamic principalagent problems with continuous choice sets. We first provide a new and simplified proof for the recursive reformulation of the sequential dynamic principalagent relationship. Next we prove the existence of a unique solution for the principal's value function, which solves the dynamic programming problem in the recursive formulation. By showing that the Bellman operator is a contraction mapping, we also obtain a convergence result for the value function iteration. To compute a solution for the problem, we have to solve a collection of static principal{agent problems at each iteration. Under the assumption that the agent's expected utility is a rational function of his action, we can transform the bilevel optimization problem into a standard nonlinear program. The final results of our solution method are numerical approximations of the policy and value functions for the dynamic principalagent model. We illustrate our solution method by solving variations of two prominent social planning models from the economics literature. 
Keywords:  Optimal unemployment tax, principalagent model, repeated moral hazard 
JEL:  C63 D80 D82 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:lan:wpaper:203620456&r=upt 
By:  Bernardo D'Auria; Dolores Garc\'ia Mart\'i; Jos\'e Antonio Salmer\'on 
Abstract:  We consider the optimal portfolio problem where the interest rate is stochastic and the agent has insider information on its value at a finite terminal time. The agent's objective is to optimize the terminal value of her portfolio under a logarithmic utility function. Using techniques of initial enlargement of filtration, we identify the optimal strategy and compute the value of the information. The interest rate is first assumed to be an affine diffusion, then more explicit formulas are computed for the Vasicek interest rate model where the interest rate moves according to an OrnsteinUhlenbeck process. We show that when the interest rate process is correlated with the price process of the risky asset, the value of the information is infinite, as is usually the case for initialenlargementtype problems. However since the agent does not know exactly the correlation factor, this may induce an infinite loss instead of an infinite gain. Finally weakening the information own by the agent, and assuming that she only knows a lowerbound for the terminal value of the interest rate process, we show that the value of the information is finite. 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1711.03642&r=upt 
By:  Kristoffer W. Eriksen; Ola Kvaløy; Miguel Luzuriaga 
Abstract:  We present an experimental study on how people take risk on behalf of others. We use three different elicitation methods, and study how each subject makes decisions both on behalf of own money and on behalf of another individualâ€™s money. We find a weak tendency of lower risktaking with othersâ€™ money compared to own money. However, subjects believe that other participants take more risk with other peopleâ€™s money than with their own. At the same time, subjects on average think that others are more risk averse than themselves. The data also reveals that subjects are quite inconsistent when making risk decisions on behalf of others, indicating random behavior. A large majority of subjects alternates between taking more risk, less risk or the same amount of risk with other peopleâ€™s money compared to own money. 
Keywords:  risktaking, other peopleâ€™s money, beliefs, preferences, experiment 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:ces:ceswps:_6378&r=upt 
By:  Carlos Cueva Herrero (Dpto. Análisis Económico Aplicado); Iñigo IturbeOrmaetxe Kortajarene (Universidad de Alicante); Giovanni Ponti (Universidad de Alicante); Josefa Tomás Lucas (Universidad de Alicante) 
Abstract:  The fact that men trade more than women in financial markets has been attributed to men’s overconfidence. However, evidence supporting this view is only indirect. We directly test this conjecture experimentally, by measuring confidence using monetary incentives before participants trade in a simulated market. We find that men are more confident and trade more than women, but we do not find that the difference in confidence explains the gender gap in trading activity. We explore alternative candidate channels such as risk aversion, financial literacy or competitiveness but find that these factors are also unlikely to play a role. 
Keywords:  Behavioral Finance, Overconfidence, Overtrading 
JEL:  C91 D70 D81 D91 
Date:  2017–10 
URL:  http://d.repec.org/n?u=RePEc:ivi:wpasad:201706&r=upt 
By:  Jan (J.P.M.) Heufer (Erasmus University Rotterdam, Erasmus School of Economics; Tinbergen Institute, The Netherlands); Per Hjertstrand (Research Institute of Industrial Economics) 
Abstract:  We propose a method to recover homothetic preferences from choice data with minor optimization or measurement errors. Our method allows for a more detailed graphical analysis to reveal subjects' preferences and to choose appropriate functional forms for parametric analysis. It can also be used to extend applications of the money metric function, such as parametric recoverability as introduced by Halevy et al. (2017). It can also improve nonparametric comparison of preferences as suggested by Heufer (2014). 
Keywords:  Graphical Analysis; Homotheticity; Money Metric Utility; Recoverability; Revealed Preference 
JEL:  C14 C91 D11 D12 
Date:  2017–11–03 
URL:  http://d.repec.org/n?u=RePEc:tin:wpaper:20170103&r=upt 
By:  Dietzenbacher, Bas (Tilburg University, Center For Economic Research); Borm, Peter (Tilburg University, Center For Economic Research); Estevez Fernandez, M.A. (Tilburg University, Center For Economic Research) 
Abstract:  This paper axiomatically studies bankruptcy problems with nontransferable utility by adequately generalizing and analyzing properties for bankruptcy rules. In particular, we discuss several consistency notions and introduce the class of parametric bankruptcy rules. Moreover, we introduce the class of adjusted bankruptcy rules and study the relative adjustment principle based on relative symmetry, truncation invariance, and minimal rights first. 
Keywords:  NTUbankruptcy problem,; axiomatic analysis; consistency; parametric bankruptcy rules; adjusted bankruptcy rules; relatived adjustment principle 
JEL:  C79 D63 D74 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:tiu:tiucen:f023d53eb84f4520aa5e9c9ebc8e7de5&r=upt 
By:  Ranehill, Eva (Department of Economics, School of Business, Economics and Law, Göteborg University); Weber, Roberto A. (Department of Economics, University of Zurich) 
Abstract:  A large body of evidence documents systematic gender differences in a variety of important economic preferences, such as risktaking, competition and prosociality. One potential implication of this literature is that increased female representation in decisionmaking bodies may significantly affect organizational and policy outcomes. However, research has yet to establish a direct connection from gender differences in simple economic choice tasks, to voting over policy and to the resulting outcomes. We conduct a laboratory experiment to provide a test of such a connection. In small laboratory “societies,” people repeatedly vote for a redistribution policy and engage in a realeffort production task. In this environment, we observe a substantial difference in voting behavior, with women voting for significantly more egalitarian redistribution policies. This gender difference is large relative to other differences based on observable characteristics and is partly explained by gender gaps in economic preferences and in beliefs about relative performance. Gender voting gaps persist with experience and in environments with varying degrees of risk. We also observe policy differences between male and femalecontrolled groups, though these are considerably smaller than the mean individual differences—a natural consequence of the aggregation of individual preferences into collective outcomes. Thus, we provide evidence for why substantial and robust gender differences in preferences may often fail to translate into differential policy outcomes with increased female representation in policymaking. 
Keywords:  gender differences; risk; altruism; redistributive preferences; experiment 
JEL:  C91 C92 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:hhs:gunwpe:0713&r=upt 
By:  Torsten Trimborn; Lorenzo Pareschi; Martin Frank 
Abstract:  In this paper, we introduce a large system of interacting financial agents in which each agent is faced with the decision of how to allocate his capital between a risky stock or a riskless bond. The investment decision of investors, derived through an optimization, drives the stock price. The model has been inspired by the econophysical LevyLevySolomon model (Economics Letters, 45). The goal of this work is to gain insights into the stock price and wealth distribution. We especially want to discover the causes for the appearance of powerlaws in financial data. We follow a kinetic approach similar to (D. Maldarella, L. Pareschi, Physica A, 391) and derive the mean field limit of our microscopic agent dynamics. The novelty in our approach is that the financial agents apply model predictive control (MPC) to approximate and solve the optimization of their utility function. Interestingly, the MPC approach gives a mathematical connection between the two opponent economic concepts of modeling financial agents to be rational or boundedly rational. We derive a moment model which is able to replicate the most prominent features of the financial markets: oscillatory price behavior, booms and crashes. Due to our kinetic approach, we can study the wealth and price distribution on a mesoscopic level. The wealth distribution is characterized by a lognormal law. For the stock price distribution, we can either observe a lognormal behavior in the case of longterm investors or a powerlaw in the case of highfrequency trader. Furthermore, the stock return data exhibits a fattail, which is a well known characteristic of real financial data. 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1711.03291&r=upt 
By:  Daniela Di Cagno (LUISS, Rome); Arianna Galliera (LUISS, Rome and Politecnico di Milano); Werner Güth (LUISS, Rome and Max Planck Institute, Bonn); Noemi Pace (Department of Economics, University Of Venice Cà Foscari) 
Abstract:  This paper attempts to identify behavioral patterns and compare their average success considering several criteria of bounded rationality. Experimentally observed choice behavior in various decision tasks is used to assess heterogeneity in how individual participants respond to 15 randomly ordered portfolio choices, each of which is experienced twice. Treatments differ in (not) granting probability information and in (not) eliciting aspirations. Since in our setting neither other regarding concerns nor risk attitude matter and probability of the binary chance move is (optimal) choiceirrelevant, categorizing decision types relies on parameter dependence and choice adaptations. We find that most participants reduce systematically suboptimality when following the identified criteria. 
Keywords:  (Un)Bounded Rationality, Satisficing, Experiments, Heterogeneity 
JEL:  D03 D81 C91 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:ven:wpaper:2017:23&r=upt 
By:  Erhard Gloetzl (Institute for the Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria;); Florentin Gloetzl (Institute for Ecological Economics, Department for Socioeconomics, Vienna University of Economics and Business, Austria;); Oliver Richters (University of Oldenburg, Department for Economics) 
Abstract:  Since the beginnings of modern economics, economists sought to emulate the revolution in physics initiated by Newton’s ‘Principia’ (1687). Concepts from mechanics have influenced economic models both in terms of methodology and content. The aim of this theoretical paper is to put forward a novel economic modeling framework that extends the analogies between economics and classical mechanics from constrained optimization to constrained dynamics. We introduce the concepts of economic forces and economic power that bear striking resemblance to physical forces and the reciprocal value of mass. In this setup, the change of a variable is determined by the forces agents employ to change it according to their desire, their power to assert their interest, and constraint forces emerging from system constraints. The approach is based on a genuine dynamic outofequilibrium analysis and can incorporate heterogeneous agents, prisoner’s dilemma situations, and behavioral assumptions different from rationality and utility maximization. Thereby, it seeks to overcome some restrictions inherent to approaches based on optimization under constraint and provide an outofequilibrium foundation for equilibrium models. We transform a static textbook exchange model into a dynamic model, and reflect on advantages, extensions and caveats of our modeling approach. 
Keywords:  Economic Model; Economic dynamics; Disequilibrium economics; Classical Mechanics; Constrained Optimization; Constrained Dynamics; General Equilibrium; Edgeworth Box. 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:old:dpaper:405&r=upt 
By:  Eva Ranehill; Roberto A. Weber 
Abstract:  Many studies document systematic gender differences in a variety of important economic preferences, such as risktaking, competition and prosociality. One potential implication of this literature is that increased female representation in decisionmaking bodies may significantly alter organizational and policy outcomes. However, research has yet to establish a direct connection from gender differences in simple economic choice tasks, to voting over policy and to the resulting outcomes. We conduct a laboratory experiment to provide a test of such a connection. In small laboratory “societies,” people repeatedly vote for a redistribution policy and engage in a realeffort production task. Women persistently vote for more egalitarian redistribution. This gender difference is large relative to other voting differences based on observable characteristics and is partly explained by gender gaps in preferences and beliefs. Gender voting gaps persist with experience and in environments with varying degrees of risk. We also observe policy differences between male and femalecontrolled groups, though these are considerably smaller than the mean individual differences—a natural consequence of the aggregation of individual preferences into collective outcomes. Thus, we provide evidence for why substantial and robust gender differences in preferences may often fail to translate into differential policy outcomes with increased female representation in policymaking. 
Keywords:  Gender differences, risk, altruism, redistributive preferences, experiment 
JEL:  C91 C92 J16 H23 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:zur:econwp:271&r=upt 