
on Utility Models and Prospect Theory 
By:  Рубинштейн Александр Яковлевич 
Abstract:  В работе рассматривается принцип рационального поведения и анализируются смысловые изменения в содержании категорий «рациональность» и «иррациональность» в ряде экономических теорий: поведенческой экономике, модели Х. Марголиса, концепциях мериторных благ и нового патернализма, теории опекаемых благ. Автор приходит к выводу, что иррациональным поведение может считаться только с точки зрения внешнего наблюдателя, с позиций его преференций и представлений о том, как должно быть. The author analyses a principle of rational behavior and the changes in the meaning of “rationality” and “irrationality” in a number of economic theories — behavioral economics, Margolis model, the concepts of merit goods and a new paternalism, the theory of patronized goods. The author comes to a conclusion, that behavior may be considered irrational only from the point of outside observer — from the point of his preferences, the notions about what “it should be”. 
Keywords:  rationality, irrationality, behavioral economics, meritorik, new paternalism, theory patronized goods 
JEL:  A12 B41 D01 D03 
URL:  http://d.repec.org/n?u=RePEc:rua:wpaper:a:pru175:ye:2017:1&r=upt 
By:  René Van den Brink (Department of Econometrics and Tinbergen Institute  VU University); Agnieszka Rusinowska (CES  Centre d'économie de la Sorbonne  UP1  Université PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique, PSE  Paris School of Economics) 
Abstract:  In this paper, we connect the social network theory on centrality measures to the economic theory of preferences and utility. Using the fact that networks form a special class of cooperative TUgames, we provide a foundation for the degree measure as a von NeumannMorgenstern expected utility function reflecting preferences over being in different positions in different networks. The famous degree measure assigns to every position in a weighted network the sum of the weights of all links with its neighbours. A crucial property of a preference relation over network positions is neutrality to ordinary risk. If an expected utility function over network positions satisfies this property and some regularity properties, then it must be represented by a utility function that is a multiple of the degree centrality measure. We show this in three steps. First, we characterize the degree measure as a centrality measure for weighted networks using four natural axioms. Second, we relate these network centrality axioms to properties of preference relations over positions in networks. Third, we show that the expected utility function is equal to a multiple of the degree measure if and only if it represents a regular preference relation that is neutral to ordinary risk. Similarly, we characterize a class of affine combinations of the outdegree and indegree measure in weighted directed networks and deliver its interpretation as a von NeumannMorgenstern expected utility function. 
Abstract:  Dans cet article, nous associons la théorie des réseaux sociaux sur les mesures de centralité à la théorie économique des préférences et de l'utilité. En utilisant le fait que les réseaux forment une classe spéciale de jeux TU coopératifs, nous fournissons une base pour la mesure de degré en tant que fonction d'utilité attendue de von NeumannMorgenstern reflétant les préférences en ce qui concerne les positions différentes dans différents réseaux. La célèbre mesure de degré attribue à chaque position d'un réseau pondéré la somme des poids de tous les liens avec ses voisins. Une propriété cruciale d'une relation de préférence sur les positions du réseau est la neutralité face au risque ordinaire. Si une fonction d'utilité attendue sur les positions du réseau satisfait cette propriété et certaines propriétés de régularité, elle doit être représentée par une fonction d'utilité qui est un multiple de la mesure de centralité de degré. Nous montrons cela en trois étapes. Tout d'abord, nous caractérisons la mesure du degré en tant que mesure de centralité pour les réseaux pondérés utilisant quatre axiomes naturels. Deuxièmement, nous rapportons ces axiomes de centralité de réseau aux propriétés des relations de préférence par rapport aux positions dans les réseaux. Troisièmement, nous montrons que la fonction d'utilité attendue est égale à un multiple de la mesure de degré si et seulement si elle représente une relation de préférence régulière qui est neutre au risque ordinaire. De même, nous caractérisons une classe de combinaisons affines de la mesure impartiale et indépendante dans les réseaux pondérés orientés et fournissons son interprétation en tant que fonction d'utilité attendue de von NeumannMorgenstern. 
Keywords:  Weighted network, network centrality, utility function, degree centrality,von NeumannMorgenstern expected utility function, cooperative TUgame, weighted directed network,Réseau pondéré,centralité,fonction d'utilité,centralité de degré,fonction d'utilité attendue de von NeumannMorgenstern,jeu coopératif,réseau pondéré orienté 
Date:  2017–07 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:halshs01592181&r=upt 
By:  Matias D. Cattaneo; Xinwei Ma; Yusufcan Masatlioglu; Elchin Suleymanov 
Abstract:  We introduce a Random Attention Model (RAM) allowing for a large class of stochastic consideration maps in the context of an otherwise canonical limited attention model for decision theory. The model relies on a new restriction on the unobserved, possibly stochastic consideration map, termed \textit{Monotonic Attention}, which is intuitive and nests many recent contributions in the literature on limited attention. We develop revealed preference theory within RAM and obtain precise testable implications for observable choice probabilities. Using these results, we show that a set (possibly a singleton) of strict preference orderings compatible with RAM is identifiable from the decision maker's choice probabilities, and establish a representation of this identified set of unobserved preferences as a collection of inequality constrains on her choice probabilities. Given this nonparametric identification result, we develop uniformly valid inference methods for the (partially) identifiable preferences. We showcase the performance of our proposed econometric methods using simulations, and provide generalpurpose software implementation of our estimation and inference results in the \texttt{R} software package \texttt{ramchoice}. Our proposed econometric methods are computationally very fast to implement. 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1712.03448&r=upt 
By:  Harin, Alexander 
Abstract:  Distributions of random variables defined on finite intervals were considered in connection with some problems of behavioral economics. To develop the results obtained for finite intervals, autoimage distributions of random variables defined on infinite or semiinfinite intervals are proposed in this article. The proposed autoimages are intended for constructing reference autoimage distributions for preliminary considerations and estimates near the boundaries of semiinfinite intervals and on finite intervals. 
Keywords:  random variables, expectation; utility; prospect theory; decision; 
JEL:  C02 C10 C18 D8 D81 
Date:  2017–11–29 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:83025&r=upt 
By:  Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Joseph E. Stiglitz; Tania Treibich 
Abstract:  We analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agentbased model populated by heterogeneous, interacting firms. Agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change, imperfect information and coordination hurdles. In these circumstances, we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naie learning rules. In fact, more sophisticated, e.g. recursive least squares (RLS) expectations produce less accurate individual forecasts and also considerably worsen the performance of the economy. Finally, we experiment with agents that adjust simply to technological shocks, and we show that individual and aggregate performances dramatically degrade. Our results suggest that fast and frugal robust heuristics are not a secondbest option: rather they are "rational" in macroeconomic environments with heterogeneous, interacting agents and changing "fundamentals". 
Keywords:  complexity, expectations, heterogeneity, heuristics, learning, agentbased model, computational economics 
Date:  2017–12–07 
URL:  http://d.repec.org/n?u=RePEc:ssa:lemwps:2017/31&r=upt 
By:  José De Sousa; AnneCélia Disdier; Carl Gaigné 
Abstract:  Using firm and industry data, we unveil two empirical regularities: (i) Demand uncertainty not only reduces export probabilities but also decreases export quantities and increases export prices; (ii) The most productive exporters are more affected by higher industrywide expenditure volatility than are the least productive exporters. We rationalize these regularities by developing a new firmbased trade model wherein managers are risk averse. Higher volatility induces the reallocation of export shares from the most to the least productive incumbents. Greater skewness of the demand distribution and/or higher trade costs weaken this effect. Our results hold for a large class of consumer utility functions. 
Keywords:  firm exports, demand uncertainty, risk aversion, expenditure volatility, skewness 
JEL:  D21 D22 F12 F14 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:rae:wpaper:201710&r=upt 
By:  Tomasello, Mario Vincenzo; Burkholz, Rebekka; Schweitzer, Frank 
Abstract:  The authors develop an agentbased model to reproduce the size distribution of R&D alliances of firms. Agents are uniformly selected to initiate an alliance and to invite collaboration partners. These decide about acceptance based on an individual threshold that is compared with the utility expected from joining the current alliance. The benefit of alliances results from the fitness of the agents involved. Fitness is obtained from an empirical distribution of agent's activities. The cost of an alliance reflects its coordination effort. Two free parameters ac and a1 scale the costs and the individual threshold. If initiators receive R rejections of invitations, the alliance formation stops and another initiator is selected. The three free parameters (ac; a1; R) are calibrated against a large scale data set of about 15,000 firms engaging in about 15,000 R&D alliances over 26 years. For the validation of the model the authors compare the empirical size distribution with the theoretical one, using confidence bands, to find a very good agreement. As an asset of our agentbased model, they provide an analytical solution that allows to reduce the simulation effort considerably. The analytical solution applies to general forms of the utility of alliances. Hence, the model can be extended to other cases of alliance formation. While no information about the initiators of an alliance is available, the results indicate that mostly firms with high fitness are able to attract newcomers and to establish larger alliances. 
Keywords:  R&D network,alliance,collaboration,agent 
JEL:  L14 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:zbw:ifwedp:2017107&r=upt 
By:  Elie Bouri (USEK Business School, Holy Spirit University of Kaslik (USEK)); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); WingKeung Wong (Department of Finance, Asia University, Department of Economics and Finance, Hang Seng Management College and Department of Economics,Lingnan University); Zhenzhen Zhu (School of Statistics, Shandong University of Finance and Economics) 
Abstract:  We extend our understanding on the role of wine investment within a portfolio of different assets (US/UK equities, bonds, gold, and housing) by considering a rich methodology based, among others, on the meanvariance and stochasticdominance approaches. The main findings suggest that wine is the best investment among all individual assets under study, and investors prefer to invest in withwine portfolios than withoutwine portfolios to gain higher expected utility when short sale is not allowed. However, investors are indifferent between portfolios with and without wine when shortselling is allowed. In addition, withwine portfolios generally either dominate individual assets or are indifferent from individual assets. Interestingly, the withwine portfolios firstorder stochastically dominates housing in both longonly and shortallowed strategies, pointing towards market inefficiency and thus the possibility for an expected arbitrage opportunity. Finally, we reveal that investors prefer the lowrisk withwine portfolios to the equalweighted portfolio, but are indifferent between the highrisk withwine portfolios and the naïve portfolio for both longonly and shortallowed strategies. Our findings can be used by investors in their investment processes and reveal the possibility of earning abnormal returns when wine is included in the investment. 
Keywords:  Wine investment, meanvariance portfolio optimization, meanrisk criterion, stochastic dominance, asset classes 
JEL:  C10 G10 G15 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:pre:wpaper:201781&r=upt 
By:  Harald W. Lang 
Abstract:  We provide experimental evidence that social comparisons affect individual risk taking. In particular, we focus on the case when individuals care about their incomerank. Our model predicts that compared to standard expected utility theory incomerank comparisons lead to less (more) risk taking in case of lotteries with more probability mass on the downside (upside) of the distribution. Evidence shows in line with our predictions that individuals take less risk when lotteries have more probability weight on the downside. However, we do not find an effect for lotteries with more upside probability mass. The effect of social comparisons on risk taking is strongest when the deciding subject and the reference subject are of the same gender. 
Keywords:  Social comparisons, individual risk taking, status, portfolio choice, relative income concerns, experiment 
JEL:  C91 D03 D81 G11 
Date:  2016–11 
URL:  http://d.repec.org/n?u=RePEc:mpi:wpaper:taxmpgrps201612&r=upt 
By:  Iain Embrey 
Abstract:  Canonical economic agents act so as to maximise a single, representative, utility function. However there is accumulating evidence that heterogeneity in thoughtprocesses may be an important determinant of individual behaviour. This paper investigates the implications of a vectorvalued generalisation of the Expected Utility paradigm, which permits agents either to deliberate as per Homoeconomics, or to act impulsively. That generalised decision theory is applied to explain irrational educational investment decisions, persistent social inequalities, the crowdingout effect, the pervasive influence of noncognitive ability on socioeconomic outcomes, and the dynamic relationships between noncognitive ability, cognitive ability, and behavioural biases. These results suggest that the generalised decision theory warrants further investigation. 
Keywords:  Decision Theory, DualSelf, Behavioural Anomalies, Human Capital, Social Exclusion, Unemployment 
JEL:  D01 D81 D91 I24 I31 J24 J64 B41 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:lan:wpaper:209919485&r=upt 
By:  Prokopczuk, Marcel; Tharann, Björn; Wese Simen, Chardin 
Abstract:  We comprehensively analyze the predictive power of several option implied variables for monthly S & P 500 excess returns and realized variance. The correlation risk premium (CRP) emerges as a strong predictor of both excess returns and realized variance. This is true both in and outofsample. A timing strategy based on the CRP leads to utility gains of more than 4.63% per annum. In contrast, the variance risk premium (VRP), which strongly predicts excess returns, does not lead to economic gains. 
Keywords:  Equity Premium; Option Implied Information; Portfolio Choice; Predictability; Timing Strategies 
JEL:  G10 G11 G17 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:han:dpaper:dp619&r=upt 
By:  James Andreoni; Paul Feldman; Charles Sprenger 
Abstract:  Recent debate has identified important gaps in the understanding of intertemporal risks. Critical to closing these gaps is evidence on which dimension of intertemporal risk – the risk or the time – is evaluated first. Though under discounted expected utility this ordering is of no consequence, under discounted nonexpected utility models the order of evaluation is critical. We provide experimental tests in which different orderings of evaluation generate different predictions for behavior. We find more support for the notion that the risk dimension is evaluated first. 
JEL:  C91 D81 D91 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:24075&r=upt 
By:  Luca Gerotto (Department of Economics, University Of Venice Cà Foscari); Antonio Paradiso (Department of Economics, University Of Venice Cà Foscari) 
Abstract:  We present a commonsource infection model for explaining the formation of expectations by households. Starting from the framework of "Macroeconomic expectations of household and professional forecasters" (C.D. Carroll, The Quarterly Journal of Economics, 2003), we augment the original model assuming that also uninformed individuals are able to update expectations according to a naive econometric process. In this novel framework, a key role is played by the parameter measuring the probability of being informed: the dynamics of this factor over time capture the level of uncertainty perceived by households. This new framework is applied to study unemployment expectations for a selected group of European countries (France, Germany, Italy and the UK). Our results show that: (i) the novel framework is supported by data on unemployment expectations; and (ii) the probability of being informed is (negatively) correlated with the level of uncertainty spread by newspapers and conveyed by Internet. 
Keywords:  Expectations, Unemployment 
JEL:  D84 E24 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:ven:wpaper:2017:29&r=upt 
By:  Tom Holden (University of Surrey); Paul Levine (University of Surrey); Jonathan Swarbrick (Bank of Canada) 
Abstract:  This note studies two forms of a utility function of consumption with habit and leisure that are (a) compatible with longrun balanced growth, (b) hit a steady state observed target for hours worked and (c) are consistent with microeconometric evidence for the intertemporal elasticity of substitution and the Frisch elasticity of labor supply. For JaimovichRebello pref erences our Theorems 1 and 2 highlight a constraint on the preference parameter needed to target the Frisch elasticity leading to a lower bound for the latter that cannot be reconciled empirically with external habit. Even with internal or no habit, the range of possible values of the Frisch elasticity lie outside empirical results unless we allow for a modest wealth e ect. In Theorem 3 we propose a generalized JR utility function that in conjunction with a labor wedge solves the problem. 
JEL:  E21 E24 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:sur:surrec:1017&r=upt 
By:  Nguyen, Duc Binh Benno; Prokopczuk, Marcel; Wese Simen, Chardin 
Abstract:  This paper examines the properties of the gold risk premium. We estimate a parsimonious model for the gold risk premium and uncover important time variations in the dynamics of the risk premium. We also estimate risk premia of the stock and bond markets, and investigate the role of gold as a hedge and safe haven asset from an exante point of view. The results show that gold is not expected to serve as hedge and safe haven for the bond and stock markets, but it is so realized expost. Further, we find that gold is neither expected to be an inflation hedge nor is it realized. 
Keywords:  Jump Risk; Tail Risk; Safe Haven; Hedge; Gold 
JEL:  G01 G10 G11 Q02 
Date:  2017–11 
URL:  http://d.repec.org/n?u=RePEc:han:dpaper:dp616&r=upt 
By:  NAKADA, Satoshi; NITZAN, Shmuel; UI, Takashi 
Abstract:  This paper proposes normative consequentialist criteria for voting rules under Knightian uncertainty about individual preferences to characterize a weighted majority rule (WMR). The criteria stress the significance of responsiveness, i.e., the probability that the social outcome coincides with the realized individual preferences. A voting rule is said to be robust if, for any probability distribution of preferences, responsiveness of at least one individual is greater than onehalf. Our main result establishes that a voting rule is robust if and only if it is a WMR without ties. This characterization of a WMR avoiding the worst possible outcomes complements the wellknown characterization of a WMR achieving the optimal outcomes, i.e., efficiency regarding responsiveness. 
Keywords:  majority rule, weighted majority rule, responsiveness, Knightian uncertainty 
JEL:  D71 D81 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:hit:hiasdp:hiase60&r=upt 
By:  Takao Asano (Okayama University); Takuji Arai (Keio University); Katsumasa Nishide (Hitotsubashi University) 
Abstract:  This paper proposes the notion of optimal initial capital (OIC) induced by the optimized certainty equivalent (OCE) discussed in BenTal and Teboulle (1986) and BenTal and Teboulle (2007), and investigates the properties of the OIC with various types of utility functions. By providing its several properties with different utility functions or other assumptions, we successfully present the OIC as a monetary utility function (negative value of risk measure) for future payoffs with the decisionmaker's concrete criteria in the background. 
Keywords:  optimal initial capital, optimized certainty equivalence, monetary utility function, prudence premium. 
JEL:  D81 G32 G11 D46 
Date:  2017–12 
URL:  http://d.repec.org/n?u=RePEc:kyo:wpaper:981&r=upt 