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on Utility Models and Prospect Theory |
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Issue of 2017‒11‒26
fourteen papers chosen by |
| By: | Daniel, Aemiro Melkamu (CERE and the Department of Economics, Umeå University); Persson, Lars (CERE and the Department of Economics, Umeå University); Sandorf, Erlend Dancke (CERE and the Department of Forest Economics, SLU) |
| Abstract: | We report on a discrete choice experiment aimed at eliciting Swedish households' willingness-to-accept a compensation for restrictions on household electricity and heating use during peak hours. When analyzing data from discrete choice experiments, we typically assume that people make rational utility maximizing decisions, i.e., that they consider all of the attribute information and compare all alternatives. However, mounting evidence shows that people use a wide range of simplifying strategies that are inconsistent with utility maximization. We use a flexible model capturing a two-stage decision process. In the fi rst stage, respondents are allowed to eliminate from their choice set alternatives that contain an unacceptable level, i.e., restrictions on the use of heating and electricity. In the second stage, respondents choose in a compensatory manner between the remaining alternatives. Our results show that about half of our respondents choose according to an elimination-by-aspects strategy, and that, on average, they are unwilling to accept any restrictions on heating in the evening or electricity use, irrespective of time-of-day. Furthermore, we nd that considering elimination-by-aspects behavior leads to a downward shift in elicited willingness-to-accept. We discuss implications for policy. |
| Keywords: | Choice experiment; Electricity contract; Willingness-to-accept; Household electricity; Elimination-by-aspects; Two-stage decision |
| JEL: | C25 Q41 Q51 R21 |
| Date: | 2017–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:slucer:2017_007&r=upt |
| By: | Sean Fahle; Santiago Sautua |
| Abstract: | We explore how risk preferences affect pro-social behavior in risky environments. We analyze a modified dictator game in which the dictator could, by reducing her own sure payoff, increase the odds that an unknown recipient wins a lottery. We first augment a standard social preferences model with reference-dependent risk attitudes and then test the model’s predictions for the dictator’s giving behavior using a laboratory experiment. As predicted by the model, giving behavior in the experiment is affected by the baseline risk faced by the recipient, the effectiveness of transfers in reducing baseline risk, and the dictator’s degree of loss aversion |
| Keywords: | other-regarding preferences; pro-social behavior; reference-dependent preferences; risk |
| JEL: | C91 D81 D91 |
| Date: | 2017–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:015815&r=upt |
| By: | Yaroslav Rosokha; Kenneth Younge |
| Abstract: | We investigate the willingness of individuals to persist at exploration in the face of failure. Prior research suggests that the organization's \tolerance for failure" may motivate greater exploration by the individual. Little is known, however, about how individuals persist at exploration in an uncertain environment when confronted by prolonged periods of negative feedback. To examine this question, we design a two-dimensional maze game and run a series of randomized experiments with human subjects in the game. We develop predictions for the game using computational models of reinforcement learning. Our methods extend beyond two-period models of decision-making under uncertainty to account for repeated behavior in longer-running, dynamic contexts. Our results suggest that individuals explore more when they are reminded of the incremental cost of their actions, a result that extends prior research on loss aversion and prospect theory to environments characterized by model uncertainty. We discuss implications for future research and for managers. |
| Keywords: | Experiments, Innovation, Persistence, Loss Aversion, Model Uncertainty |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1301&r=upt |
| By: | Czichowsky, Christoph; Schachermayer, Walter; Yang, Junjian |
| Abstract: | In a financial market with a continuous price process and proportional transaction costs, we investigate the problem of utility maximization of terminal wealth. We give sufficient conditions for the existence of a shadow price process, i.e., a least favorable frictionless market leading to the same optimal strategy and utility as in the original market under transaction costs. The crucial ingredients are the continuity of the price process and the hypothesis of "no unbounded profit with bounded risk". A counterexample reveals that these hypotheses cannot be relaxed. |
| Keywords: | utility maximization; proportional transaction costs; convex duality; shadow prices; continuous price processes |
| JEL: | C61 G11 |
| Date: | 2017–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:63370&r=upt |
| By: | Aurélie Méjean (CNRS-CIRED); Antonin Pottier (Centre d’Economie de la Sorbonne – CNRS); Stéphane Zuber (PSE-CNRS); Marc Fleurbaey (Woodrow Wilson School of Public and International Affairs, Princeton University) |
| Abstract: | Climate change raises the issue of intergenerational equity. As climate change threatens irreversible and dangerous impacts, possibly leading to extinction, the most relevant trade-off may not be between present and future consumption, but between present consumption and the mere existence of future generations. To investigate this trade-off, we build an integrated assessment model that explicitly accounts for the risk of extinction of future generations. We compare different climate policies, which change the probability of catastrophic outcomes yielding an early extinction, within the class of variable population utilitarian social welfare functions. We show that the risk of extinction is the main driver of the preferred policy over climate damages. We analyze the role of inequality aversion and population ethics. Usually a preference for large populations and a low inequality aversion favour the most ambitious climate policy, although there are cases where the effect of inequality aversion is reversed. |
| Keywords: | Climate Change, Catastrophic risk, Equity, Population, Climate-economy model |
| JEL: | D63 Q01 Q54 Q56 Q5 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2017.25&r=upt |
| By: | Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (School of Finance, Central University of Finance and Economics); Fuyang Zhao (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics) |
| Abstract: | In this paper, we introduce a complementary relationship between consumption and labor hours by revising the household's period utility function in Liu et al. (2013). The revision concomitantly allows for a finite Frisch elasticity of labor supply and a stronger consumption smoothing motive. We find that, in general, the estimation of Liu et al. (2013) is quite robust. In addition, the propagation mechanism of the credit constraint triggered by a housing demand shock still persists. However, the amplification effect of the credit constraint triggered by the housing demand shock on key macroeconomic variables is greatly muted. We also find that, except for land price fluctuations, the housing demand shock cannot act as the primary force to drive the fluctuations in other macroeconomic variables. |
| Keywords: | Collateral constraint, Housing demand shock, Nonseparable preferences, Macroeconomic fluctuations |
| JEL: | E5 F3 F4 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:605&r=upt |
| By: | Christian Kellner (University of Southampton); David Reinstein (Department of Economics, University of Exeter); Gerhard Riener (Heinrich Heine University Düsseldorf) |
| Abstract: | We study how other-regarding behavior extends to environments with income uncertainty and conditional commitments. Should fundraisers ask a banker to donate “if he earns a bonus” or wait and ask after the bonus is known? Standard EU theory predicts these are equivalent; loss-aversion and signaling models predict a larger commitment before the bonus is known; theories of affect predict the reverse. In five experiments incorporating lab and field elements (N=1363), we solicited charitable donations from lottery winnings worth between $10 and $30, varying the conditionality of donations between participants. While the results suggest some heterogeneity across experimental contexts and demographic groups, in each experiment conditional donations (“if you win”) were higher than ex-post donations. Pooling across experiments, this is strongly statistically significant; we find a 23% greater likelihood of donating and a 25% larger average donation commitment in the Before treatment. Our findings add to our understanding of pro-social behavior and have implications for charitable fundraising, for effective altruism giving pledges, and for experimental methodology. |
| Keywords: | Social preferences, contingent decision-making, signaling, field experiments, charitable giving. |
| JEL: | D64 C91 C93 L30 D01 D03 D84 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1707&r=upt |
| By: | Salmeron Garrido, Jose Antonio; García Martí, Dolores; D'Auria, Bernardo |
| 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 herportfolio 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 Ornstein-Uhlenbeck 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 initial-enlargement-type 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 lower-bound for the terminal value of the interest rate process, we show that the value of the information is finite. |
| Keywords: | Value of the information; Vasicek interest rate model; Enlargement of filtrations; Optimal portfolio |
| JEL: | G14 G12 G11 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:25819&r=upt |
| By: | Jean-Michel Grandmont (ICEF, Department of Economics, University Cà Foscari di Venezia at San Giobbe, Italy, CREST (EXCESS, UMR CNRS 9194), University of Paris-Saclay, France, and Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | We evaluate the income elasticity of the aggregate budget share spent on a sub-group of commodities, in a competitive framework, by a continuum of agents having the same income, but heterogeneous behavior described by an "homothetic preferences scaling factor" having a bounded Pareto distribution in the population. If individual budget share increases globally significantly in the limit from low to large incomes, aggregate budget share is locally increasing with medium range incomes when the logarithm of the heterogeneity factor has an increasing (exponential) density with a large support. Aggregate income elasticity converges to that exponential density parameter when its support becomes infinitely large. Symmetric results hold in the decreasing case. Applications are made to market expenditures, wealth effects on portfolio choice with many risky assets, concave expenditures, that are compatible with standard (expected) utility maximization or other "behavioral" decision making processes. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2017-31&r=upt |
| By: | Matheus Assaf |
| Abstract: | Textbook narratives usually describe the Ramsey-Cass-Koopmans model of optimal growth as an important development over Solow’s model. The constant saving rate rule of the latter is replaced by an endogenous determination of savings rates based on utility maximization behaviour of the former. However, neither Tjalling Koopmans nor David Cass were trying to upgrade Robert Solow’s modelling of savings with their contributions. Koopmans was pushing for utilitarian analysis to study economic growth within the activity analysis community, with the help of Edmond Malinvaud. Cass and his colleagues at Stanford’s graduate program were exploring the multiple applications of the maximum principle on economic growth models, influenced mostly by Hirofumi Uzawa. When the group of Stanford students graduated and moved to different departments, Karl Shell brought his interest on optimal growth and technical progress to the MIT. There, he organized a conference in 1965-66 that united his Stanford colleagues and MIT young scholars to discuss optimal growth theory. The conference represented the formation of a scientific community that consolidated optimal growth theory in the second half of the 1960 decade. The link between optimal growth theory and Solow’s model was consolidated by this community of young students. Most of them were advised by Solow. This paper plans to shed some light on the importance of the MIT in the history of optimal growth theory and to show how the standard textbook narrative is a MIT-only story. |
| Keywords: | Optimal growth; History of Economic Thought; David Cass; Robert Solow. |
| JEL: | B22 B23 B29 |
| Date: | 2017–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2017wpecon20&r=upt |
| By: | Suehyun Kwon |
| Abstract: | This paper studies general equilibrium when workers in the economy are also consumers of final goods. Once a firm and a worker are matched, there is a standard moral hazard problem. However, the firm’s profit depends on the price of the good the worker produces, and the price is determined by the total supply and demand in the economy. The worker’s expected utility also depends on the number of units they consume and therefore depends on the price of the good. I characterize the set of equilibria and show that there is a unique equilibrium level of worker’s outside option to price ratio. When the government changes minimum wage, the outside option for workers change through limited liability. In any equilibrium, the price responds proportionally to the change in minimum wage; the incentivized effort, the expected outcome, consumption and the expected utility of workers all remain exactly the same, and only the prices change as a result. |
| Keywords: | general equilibrium, contracts, moral hazard, minimum wage |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6263&r=upt |
| By: | Pablo Gluzmann (CEDLAS-FCE-UNLP & CONICET); Leonardo Gasparini (CEDLAS-FCE-UNLP & CONICET) |
| Abstract: | In this paper we compute inequality measures over the distribution of a subjective well-being variable constructed from a life satisfaction question included in the Gallup World Poll in almost all countries in the world. We argue that inequality in subjective well-being may be a better proxy for the degree of unfairness in a society than income inequality. We find evidence that inequality in subjective well-being has an inverse-U relationship with per capita GDP, but it is monotonically decreasing with respect to mean subjective well-being. We argue that this difference might be associated to inequality aversion in the space of utility. |
| JEL: | I31 D31 D39 D63 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0216&r=upt |
| By: | Mykola Babiak |
| Abstract: | This paper provides a generalized disappointment aversion (GDA) interpretation of the variance and skew risk premia in equity returns and the volatility skew in equity index options. The key ingredients are Bayesian learning about a hidden con- sumption growth rate and the investor's tail aversion induced by GDA preferences which amplify the impact of consumption shocks. This model with disappointment risk reproduces salient properties of the variance and skew risk premia and generates a realistic volatility skew implied by index options, while simultaneously matching the mean and volatility of risk-free rate and equity returns, and the level of the price-dividend ratio. Additionally, the time-varying probability of disappointment events generates a wide range of dynamic asset pricing phenomena. |
| Keywords: | equity premium; variance and skew risk premia; volatility skew; generalized disappointment aversion; learning; Markov switching |
| JEL: | D81 E32 E44 G12 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp606&r=upt |
| By: | Jean-Michel Grandmont (ICEF, Department of Economics, University Cà Foscari di Venezia at San Giobbe, Italy, CREST (EXCESS, UMR CNRS 9194), University of Paris-Saclay, France, and Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | This work introduces a new mechanism generating procyclical comovements of labor productivity, employment, through endogenous variations of workers' effort, in a simple model with efficiency wages, near a locally indeterminate steady state. A current endogenous countercyclical uncertainty shock makes risk averse workers more willing to provide imperfectly monitored "precautionary effort" by increasing their expected utility gain of not shirking. If workers' relative prudence is small and decreasing fast near the steady state, frms' efficiency wage contracts generate significant endogenous procyclical variations of effort, employment and labor productivity, in particular when the capital-efficient labor elasticity of substitution is smaller than and close to 1. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2017-32&r=upt |