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on Utility Models and Prospect Theory |
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Issue of 2018‒04‒09
sixteen papers chosen by |
| By: | Marco Maggis |
| Abstract: | We propose an axiomatic approach which economically underpins the representation of dynamic preferences in terms of a stochastic utility function, sensitive to the information available to the decision maker. Our construction is recursive and based on inter-temporal preference relations, whose characterization is inpired by the original intuition given by Debreu's State Dependent Utilities (1960). |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1803.05244&r=upt |
| By: | Franz Dietrich (PSE - Paris School of Economics, CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne) |
| Abstract: | This paper proposes a simple unified framework of choice under changing awareness, addressing both outcome awareness and (nature) state awareness, and both how fine and how exhaustive the awareness is. Six axioms characterize an (essentially unique) expected-utility rationalization of preferences, in which utilities and probabilities are revised according to three revision rules when awareness changes: (R1) utilities of unaffected outcomes are transformed affinely; (R2) probabilities of unaffected events are transformed proportionally; (R3) enough probabilities ‘objectively’ never change (they represent revealed objective risk). Savage's Theorem is a special case of the theorem, namely the special case of fixed awareness, in which our axioms reduce to Savage's axioms while R1 and R2 hold trivially and R3 reduces to Savage's requirement of atomless probabilities. Rule R2 parallels Karni and Viero's (2013) ‘reverse Bayesianism’ and Ahn and Ergin's (2010) ‘partition-dependence’. The theorem draws mathematically on Kopylov (2007), Niiniluoto (1972) and Wakker (1981). |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01743898&r=upt |
| By: | Breitmoser, Yves (HU Berlin); Vorjohann, Pauline (HU Berlin) |
| Abstract: | Why do people give when asked, but prefer not to be asked, and even take when possible? We show that standard behavioral axioms including separability, narrow bracketing, and scaling invariance predict these seemingly inconsistent observations. Specifically, these axioms imply that interdependence of preferences (\"altruism\") results from concerns for the welfare of others, as opposed to their mere payoffs, where individual welfares are captured by the reference-dependent value functions known from prospect theory. The resulting preferences are non-convex, which captures giving, sorting, and taking directly. Re-analyzing choices of 981 subjects in 83 treatments covering many variants of dictator games, we find that individual reference points are distributed consistently across studies, allowing us to classify subjects as either non-givers, altruistic givers, or social pressure givers and use welfare-based altruism to reliably predict giving, sorting, and taking across experiments. |
| Keywords: | social preferences; axiomatic foundation; robustness; giving; charitable donations; |
| JEL: | C91 D64 D03 |
| Date: | 2018–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:89&r=upt |
| By: | Nembua Célestin, Chameni; Wendji Clovis, Miamo |
| Abstract: | The main goal of the paper is to shed light on economic allocations issues, in particular by focusing on individuals who receive nothing (that is an amount of zero allocation or payoff). It is worth noting that such individuals may be considered, in some contexts, as poor or socially excluded. To this end, our study relies on the notion of cooperative games with transferable utility and the Linear Efficient and Symmetric values (called LES values) are considered as allocation rules. Null players in Shapley sense are extensively studied ; two broader classes of null players are introduced. The analysis is facilitated by the help of a parametric representation of LES values. It is clearly shown that the control of what a LES value assigns as payoffs to null players gives significant information about the characterization of the value. Several axiomatic characterizations of subclasses of LES values are provided using our approach. |
| Keywords: | TU-game, Linear Efficient and Symmetric value, Null players, Average null players, Shapley value, Solidarity value. |
| JEL: | C71 D31 D71 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83670&r=upt |
| By: | Ali al-Nowaihi; Sanjit Dhami |
| Abstract: | We consider discounted-utility models with a reference stream of outcomes. We provide a common framework for the main empirically supported discount functions in terms of three underlying functions: The delay, speedup and generating functions. Each of the delay and speedup functions can be uniquely elicited from behavior and, hence, can be fitted to the data. These two functions determine whether the discount function is subadditive, additive or superadditive; and whether the discount function exhibits declining, constant or increasing impatience. The third function, the generating function, links the speedup function to the discount function. Our framework nests several important attribute-based models that are typically considered to be in a separate class. We also show that apparent intransitivities of time preferences can be accounted for by framing effects. |
| Keywords: | time discounting, framing effects, impatience, additivity, common difference effect, intransitive preferences |
| JEL: | C60 D91 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6913&r=upt |
| By: | Ruimeng Hu |
| Abstract: | This paper studies the portfolio optimization problem when the investor's utility is general and the return and volatility of the risky asset are fast mean-reverting, which are important to capture the fast-time scale in the modeling of stock price volatility. Motivated by the heuristic derivation in [J.-P. Fouque, R. Sircar and T. Zariphopoulou, \emph{Mathematical Finance}, 2016], we propose a zeroth order strategy, and show its asymptotic optimality within a specific (smaller) family of admissible strategies under proper assumptions. This optimality result is achieved by establishing a first order approximation of the problem value associated to this proposed strategy using singular perturbation method, and estimating the risk-tolerance functions. The results are natural extensions of our previous work on portfolio optimization in a slowly varying stochastic environment [J.-P. Fouque and R. Hu, \emph{SIAM Journal on Control and Optimization}, 2017], and together they form a whole picture of analyzing portfolio optimization in both fast and slow environments. |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1803.07720&r=upt |
| By: | DREZE Jean (CORE, Université catholique de Louvain) |
| Abstract: | Under state-dependent preferences, probabilities and units of scale of state-dependent utilities are not separately identified, in standard models: only their products matter to decisions. Separate identification has been studied under implicit actions (Drèze 1961, 1987) or under explicit actions and observations (Karni 2011, 2013). This paper complements both approaches and relates them, when conditional preferences for final outcomes are independent of actions and observations. That special case permits drastic technical simplification while remaining open to some natural extensions. |
| Keywords: | expected utility, state-dependent preferences, subjective probability |
| JEL: | D81 |
| Date: | 2018–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2018003&r=upt |
| By: | Charles-Albert Lehalle; Othmane Mounjid; Mathieu Rosenbaum |
| Abstract: | We consider an agent who needs to buy (or sell) a relatively small amount of asset over some fixed short time interval. We work at the highest frequency meaning that we wish to find the optimal tactic to execute our quantity using limit orders, market orders and cancellations. To solve the agent's control problem, we build an order book model and optimize an expected utility function based on our price impact. We derive the equations satisfied by the optimal strategy and solve them numerically. Moreover, we show that our optimal tactic enables us to outperform significantly naive execution strategies. |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1803.05690&r=upt |
| By: | Nobuyuki Hanaki (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Eizo Akiyama (Faculty of Engineering, Information and Systems, University of Tsukuba - University of Tsukuba); Ryuichiro Ishikawa (School of International Liberal Studies, Waseda University) |
| Abstract: | By how much does the presence of behavioral uncertainty in an experimental asset market reduce subjects' confidence in their price forecasts? An incentivized interval forecast elicitation method is employed to answer this question. Each market consists of six traders, and the value of dividends is known. Two treatments are considered: six human traders (6H), and one human interacting with five computer traders whose behavior is known (1H5C). We find that while the deviation of the initial price forecasts from fundamental value is smaller in the 1H5C treatment than in the 6H treatment, albeit not statistically significantly, the average confidence regarding the forecasts is not. We further analyze the relationships between subjects' confidence in their forecasts and their trading behavior, as well as their trading performance, in the 6H treatment. While subjects' high confidence in their short-term forecasts shows a negative correlation with their trading performance, high confidence in their long-term forecasts shows a positive correlation with trading performance. |
| Keywords: | D84,Price forecasts,interval elicitation,experimental asset markets,behavioral uncertainty JEL Code: C90 |
| Date: | 2018–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01712301&r=upt |
| By: | Glenn Boyle (University of Canterbury); Gerald Ward |
| Abstract: | We explore the value of private investment information using data from a singular source: auctions of yearling racehorses. Horse breeders possess superior information about their own horses and have strong financial incentives to buy the best of these back at auction. However, those they repurchase subsequently perform significantly worse on average, earning 30% less at the racetrack than horses purchased by out-siders. Moreover, this underperformance is concentrated in male horses, despite these being purchased exclusively for racing purposes. These puzzling findings can-not be explained by differences in horse risk or breeder abilities, or by non-financial objectives, or by behavioral or selection biases. |
| Keywords: | Auctions; racehorses; buybacks |
| JEL: | G02 G11 G14 L83 D44 |
| Date: | 2018–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:18/06&r=upt |
| By: | Kallas, Z.; Alba, M. F.; Casellas, Karina; Berges, Miriam; De Greef, G.; Gil, J. M. |
| Abstract: | This study analysed consumers' expected preference toward local honey with different colour and texture. We analysed the impact of the sensory experience on consumers' expectation and their willingness to pay for the honey products. We carried out two Non-Hypothetical Discrete Choice Experiments (DCE) by creating a real shopping scenario before and after the hedonic sensory test for a sample of 145 consumers from Mar del Plata, Argentina. Data used in this analysis were obtained from questionnaires completed in a controlled environment and estimated using the random parameters Logit model (MIXL). Results showed both high preference and acceptance for local honey with solid texture and light colour and also revealed a high rejection for dark honeys. Consumers also declared their willingness to pay a premium for their most preferred honey type if it is produced from local place. The sensory experience has had impact on expectation. Consumers were not willing to compromise their perceived quality and their eating experience with other descriptors of the honey product. |
| Keywords: | Miel; Preferencias del Consumidor; Modelo de Elección Discreta; Argentina; |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:2849&r=upt |
| By: | Mongin, Philippe; Cozic, Mikaël |
| Abstract: | Nudge is a concept of policy intervention that originates in Thaler and Sunstein's (2008) popular eponymous book. Following their own hints, we distinguish three properties of nudge interventions: they redirect individual choices by only slightly altering choice conditions (here nudge 1), they use rationality failures instrumentally (here nudge 2), and they alleviate the unfavourable effects of these failures (here nudge 3). We explore each property in semantic detail and show that no entailment relation holds between them. This calls into question the theoretical unity of nudge, as intended by Thaler and Sunstein and most followers. We eventually recommend pursuing each property separately, both in policy research and at the foundational level. We particularly emphasize the need of reconsidering the respective roles of decision theory and behavioural economics to delineate nudge 2 correctly. The paper differs from most of the literature in focusing on the definitional rather than the normative problems of nudge. |
| Keywords: | nudge; liberal paternalism; policy analysis; behavioural economics; decision theory; rationality; decision biases; Thaler and Sunstein; Kahneman and Tversky |
| JEL: | D03 D18 D70 K32 K39 M38 |
| Date: | 2017–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1186&r=upt |
| By: | Batabyal, Amitrajeet; Beladi, Hamid |
| Abstract: | We provide the first strategic analysis of the interaction between a continuum of potentially green consumers and two firms in regional science. Firm 1 (2) sells new (remanufactured) toner cartridges. Each firm selects its price and a consumer purchases from the firm that offers her the highest utility. Utility is given by a surplus measure, the price, and by the transport cost incurred in traveling to a firm’s location. We first derive the best response functions of the two firms. Second, we stipulate a numerical value for the surplus measure and show that when the two firms select their “monopoly” prices, the Nash equilibrium is unique. Third, we specify a linear transport cost function with a constant coefficient and show that the costlier it is for consumers to get to the locations of the two firms, the higher is the price charged by these two firms. Finally, our analysis shows that there is a need to study models in which the two toner cartridges are dissimilar, the interaction between consumers and firms is repeated, and behavioral factors are taken into account. |
| Keywords: | Bertrand Model, New Good, Purchase, Remanufactured Good, Transport Cost |
| JEL: | Q57 R41 |
| Date: | 2017–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:85315&r=upt |
| By: | Achilleas Vassilopoulos (ICRE8: International Centre for Research on the Environment and the Economy); Andreas C. Drichoutis (Department of Agricultural Economics & Rural Development, Agricultural University of Athens); Rodolfo M. Nayga, Jr (Department of Agricultural Economics & Agribusiness, University of Arkansas) |
| Abstract: | We present the results of an economic laboratory experiment that tests behavioral biases that have been associated with the BDM mechanism. By manipulating the highest random competing bid, the maximum possible loss, the distribution of prices and the elicitation format, we attempt to disentangle the e ects of reference-dependence, expectations as well as price and loss anchoring on subjects' bids. The results show that bids are a ected by expectations and anchoring on the highest price but not by anchoring on the maximum possible loss. In addition, results are supportive of the no-loss-in-buying hypothesis of Novemsky and Kahneman (2005) |
| Keywords: | Becker-DeGroot-Marschak (BDM) mechanism; expectations; anchoring; valuation; experiment. |
| JEL: | C91 D44 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:aua:wpaper:2018-1&r=upt |
| By: | Lotfaliei, Babak |
| Abstract: | This paper investigates how the asset-return variance risk premium changes leverage. I find that the premium lowers leverage by increasing risk-neutral bankruptcy probability and costs in a model where asset returns have stochastic variance with risk premium. Empirically, the model calibrations verify significant reduction in optimal leverage, closer to observed leverage than the model without the premium. In model-free regressions, I also document negative correlation between leverage and the variance premium. The most negative correlation is among investment-grade firms with low asset beta and historical variance but high variance premium because their assets have high exposure to market variance premium. JEL Classification: G32, G33, G12 |
| Keywords: | capital structure, optimal leverage, variance risk premium |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201870&r=upt |
| By: | Claus-Jochen Haake (Paderborn University); Nadja Stroh-Maraun (Paderborn University) |
| Abstract: | We show that the Boston school choice mechanism (BM), the student proposing deferred acceptance algorithm (DA) and the top trading cycles algorithm (TTC) generate the same outcome when the colleges’ priorities are modified according to students’ preferences in a “first preferences first” manner. This outcome coincides with the BM outcome under original priorities. As a result, the DA and TTC mechanism that are non-manipulable under original priorities become vulnerable to strategic behavior. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:ciepap:111&r=upt |