
on Utility Models and Prospect Theory 
By:  Yosuke Hashidate (CIRJE, Faculty of Economics, The University of Tokyo) 
Abstract:  This paper presents a theory of preferences for randomization by using the framework of preferences over menus. In the framework, the decision maker chooses a menu at the first stage; at the second stage, she chooses a probability distribution on the chosen menu at the first stage. The resulting behavior is captured by expected utility theory, but at the choice of the first stage, the decision maker may have nonlinear preferences due to cognitive effects. This paper introduces a new axiom on preferences for randomization by relaxing the axioms of Strategic Rationality and Independence. Instead, this paper imposes on the axioms of Randomization and Strong Singleton Independence. The new axioms, along with basic axioms, characterize a random anticipated utility representation, in which the subjective belief for the effect of randomization is uniquely identified. Randomization attitudes, captured by probabilityweighting functions, and risk attitude are separately identified. By relaxing the two axioms, this paper studies more general cases such as preferences for exibility, subjective learning, and costly randomization. Moreover, the resulting behaviors are characterized by stochastic choice functions. 
Date:  2018–04 
URL:  http://d.repec.org/n?u=RePEc:tky:fseres:2018cf1083&r=upt 
By:  Benedict Dellaert; Theo Arentze; Oliver Horeni; Harry Timmermans 
Abstract:  The measurement of user preferences has received much attention in consumer research in areas such as housing, retailing, recreation and transportation. A method that is widely used to estimate preference values of attributes of locations, products or services is conjoint analysis. Measuring the preferences quantitatively the method allows realestate suppliers to determine the relative importance of attributes for meeting the demand of users. As an exploratory tool, however, it has limitations, as the attributes included in choice experiments need to be predefined and must be limited in number. Therefore, a complementary stream of research has focused on cognitive mapping methods to elicit consumers’ considerations of attributes and benefits in choice situations.Arentze et al. (2008) and Dellaert et al. (2008) proposed a cognitive mapping method for revealing consumers’ mental representations of a choice problem in complex decisions. The socalled CNET method has similarities with meansend analysis. The cognitive mapping method does not impose restrictions on the number of attributes that can be included in the analysis. Furthermore, just as meansend analysis, it has the advantage of also revealing the benefits (reasons) underlying attribute considerations. On the other hand, it does not allow quantification of preference values and, hence, assessment of relative importance users associate to the attributes involved, as conjoint analysis does.To combine the specific strengths of the two methods (conjoint analysis and cognitive mapping), in the present paper, we propose a new approach. The approach builds on the theory underlying the CNET model which states that cognitive links between alternatives and attributes and between attributes and benefits are more likely to be activated in a consumer’s mental representation if the expected gains of taking into account these links in terms of achieving better choice outcomes are higher (Arentze et al. 2015). In this paper we derive how this model can be used to determine the utility of attributes directly from mental representations and extend the model to complex decisions with multiple decision dimensions. In this way, the new method allows taking large sets of attributes into account and at the same time offers quantitative measurement of preferences. We illustrate the approach using data on 594 individuals’ means–end chain responses for a hypothetical shopping location decision problem. 
Keywords:  Cognitive mapping; Preference measurement; Randomutilitymaximization models; Shopping location choice 
JEL:  R3 
Date:  2017–07–01 
URL:  http://d.repec.org/n?u=RePEc:arz:wpaper:eres2017_77&r=upt 
By:  Gollier, Christian; Kimball, Miles S. 
Abstract:  The Diffidence Theorem, together with complementary tools, can aid in illuminating a broad set of questions about how to mathematically characterize the set of utility functions with specified economic properties. This paper establishes the technique and illustrates its application to many questions, old and new. For example, among many other older and other technically more difficult results, it is shown that (1) several implications of globally greater risk aversion depend on distinct mathematical properties when the initial wealth level is known, (2) whether opening up a new asset market increases or decreases saving depends on whether the reciprocal of marginal utility is concave or convex, and (3) whether opening up a new asset market raises or lowers risk aversion towards small independent risks depends on whether absolute risk aversion is convex or concave. 
Date:  2018–04 
URL:  http://d.repec.org/n?u=RePEc:ide:wpaper:32600&r=upt 
By:  JeanPierre Drugeon (PSE  Paris School of Economics, PJSE  Paris Jourdan Sciences Economiques  UP1  Université PanthéonSorbonne  ENS Paris  École normale supérieure  Paris  INRA  Institut National de la Recherche Agronomique  EHESS  École des hautes études en sciences sociales  ENPC  École des Ponts ParisTech  CNRS  Centre National de la Recherche Scientifique); Thai HaHuy (EPEE  Centre d'Etudes des Politiques Economiques  UEVE  Université d'ÉvryVald'Essonne) 
Abstract:  This article builds an axiomatization of intertemporal tradeoffs that makes an explicit account of the distant future and therefore encompasses motives related to sustainability, transmission to offsprings and altruism. The focus is on separable representations and the approach is completed following a decisiontheory index based approach that is applied to utility streams. This enlightens the limits of the commonly used tail intensity requesites for the evaluation of utility streams: in this article, these are supersed and replaced by an axiomatic approach to optimal myopia degrees that in its turn precedes the determination of optimal discount. The overall approach is anchored in the new and explicit proof of a temporal decomposition of the preference orders between the distant future and the close future itself directly related to the determination of the optimal myopia degrees. The argument is shown to provide a novel understanding of temporal biases with the scope for a distant future bias when the finite dimensional gets influenced by the infinite dimensional. The reference to robust orders and pessimismlike axioms finally allows for determining tractable representations for the indexes. 
Abstract:  JEL Codes: D11, D15, D90. 
Keywords:  Discount,Temporal Order Decompositions,Infinite Dimensional Topologies,Axiomatization,Myopia 
Date:  2018–04 
URL:  http://d.repec.org/n?u=RePEc:hal:psewpa:halshs01761962&r=upt 
By:  Bilbiie, Florin Ovidiu 
Abstract:  In businesscycle, macro models the elasticity of intertemporal substitution (EIS) governs the economy's response to demand shocks and policy changes ("multipliers"). With general nonseparable preferences, the EIS is determined by consumptionhours complementarity and the income effect on hours. Complementarity helps generate businesscycle comovement following demand shocks, fiscal multipliers, and allows reconciling low EIS with low incomewealth effects. Yet existing utility functions restrict either complementarity, or income effectsor bothand artificially imply that EIS is exclusively a function of either. I propose a novel utility function where both complementarity and the income effect are arbitrary and can be calibrated separately. 
Keywords:  businesscycle comovement; consumptionhours complementarity; elasticity of intertemporal substitution; Fiscal multipliers; income and wealth effects; news shocks 
JEL:  D11 E21 E62 H31 
Date:  2018–03 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:12812&r=upt 
By:  Christophette BlanchetScalliet (ICJ  Institut Camille Jordan [Villeurbanne]  ECL  École Centrale de Lyon  Université de Lyon  UCBL  Université Claude Bernard Lyon 1  Université de Lyon  INSA Lyon  Institut National des Sciences Appliquées de Lyon  Université de Lyon  UJM  Université Jean Monnet [SaintÉtienne]  CNRS  Centre National de la Recherche Scientifique); Diana Dorobantu (ICJ  Institut Camille Jordan [Villeurbanne]  ECL  École Centrale de Lyon  Université de Lyon  UCBL  Université Claude Bernard Lyon 1  Université de Lyon  INSA Lyon  Institut National des Sciences Appliquées de Lyon  Université de Lyon  UJM  Université Jean Monnet [SaintÉtienne]  CNRS  Centre National de la Recherche Scientifique); Yahia Salhi (SAF  Laboratoire de Sciences Actuarielle et Financière  UCBL  Université Claude Bernard Lyon 1  Université de Lyon) 
Abstract:  In this paper, we study the pricing of life insurance portfolios in the presence of dependent lives. We assume that an insurer with an initial exposure to n mortalitycontingent contracts wanted to acquire a second portfolio constituted of m individuals. The policyholders' lifetimes in these portfolios are correlated with a FarlieGumbelMorgenstern (FGM) copula, which induces a dependency between the two portfolios. In this setting, we compute the indifference price charged by the insurer endowed with an exponential utility. The optimal price is characterized as a solution to a backward differential equation (BSDE). The latter can be decomposed into (n − 1)n! auxiliary BSDEs. In this general case, the derivation of the indifference price is computationally infeasible. Therefore, while focusing on the example of death benefit contracts, we develop a model point based approach in order to ease the computation of the price. It consists on replacing each portfolio with a single policyholder that replicates some risk metrics of interest. Also, the two representative agents should adequately reproduce the observed dependency between the initial portfolios. 
Keywords:  representative contract,indifference pricing, utility maximization, life insurance 
Date:  2017 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal01258645&r=upt 
By:  Giuliano Curatola; Stefano Colonnello; Alessandro Gioffré 
Abstract:  We develop a model that reproduces the average return and volatility spread between sin and nonsin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. We show that when dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. Our empirical analysis supports the model's predictions. 
Keywords:  Asset Pricing, General Equilibrium, Sin Stocks 
JEL:  D51 D91 E20 G12 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:frz:wpaper:wp2018_05.rdf&r=upt 
By:  Claudia Ceci; Katia Colaneri; Alessandra Cretarola 
Abstract:  In this paper we investigate the pricing problem of a pure endowment contract when the insurer has a limited information on the mortality intensity of the policyholder. The payoff of this kind of policies depends on the residual life time of the insured as well as the trend of a portfolio traded in the financial market, where investments in a riskless asset, a risky asset and a longevity bond are allowed. We propose a modeling framework that takes into account mutual dependence between the financial and the insurance markets via an observable stochastic process, which affects the risky asset and the mortality index dynamics. Since the market is incomplete due to the presence of basis risk, in alternative to arbitrage pricing we use expected utility maximization under exponential preferences as evaluation approach, which leads to the socalled indifference price. Under partial information this methodology requires filtering techniques that can reduce the original control problem to an equivalent problem in complete information. Using stochastic dynamics techniques, we characterize the value function as well as the indifference price in terms of the solution to a quadraticexponential backward stochastic differential equation. 
Date:  2018–03 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1804.00223&r=upt 
By:  Friedrich, Thomas 
Abstract:  In this model the basic ensemble consists of a source and a sink, three basic ensembles constitute an organism or company (both an ensemble of ensembles) and nine organisms/companies form a population or a branch of industry. Each organism is composed of either connected or unconnected ensembles. Linear costfunctions and saturating benefitfunctions create superadditivity (better net profit) through a rational and peaceful transfer of substrate within a basic ensemble. Transfers by force and deception are not jet considered. All ensembles have an identical and limited concentration range and all concentrations are of the same probability. Random mutations change cost factors (cf), MichaelisMenten constants (Km) and the maximal reaction velocities (Vmax) in source and sink of the basic ensemble. Km and Vmax shape a saturating benefitfunction in MichaelisMenten type enzyme kinetics resembling the utility function in economics. The result of mutations in the basic ensemble is a higher or lower cumulative superadditivity of an organism/company and its master if installed. The most effective organisms or masters prevail within the population. Recombination of ensembles between organisms accelerates evolution. Independent of the starting point and with or without a fix cost I observe the evolution towards strong asymmetry and inequality with a division of labour resulting in the development of a collector and a manufacturer. Although I observe a winwin situation reciprocity will become a necessity. 
Keywords:  ensemble, transfer space, benefit, cost, utility, net profit, mutation, recombination, division of labour, asymmetry, inequality, quantity to quality transition, complexity 
JEL:  A19 P40 
Date:  2018–03–27 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:85517&r=upt 
By:  Alessandro Tampieri; Elena Parilina 
Abstract:  We investigate divorce choice when the population distribution is non stationary and divorce entails an explicit cost. We consider a nontransferable utility, three period model where heterogeneous individuals may divorce the partner and reenter the marriage market. Individuals choices are based on the change in the distribution of singles, the cost of waiting and divorcing, and take into account the individual own's eligibility in the marriage market. We show the existence of "divorce" and "no divorce" equilibria. Divorce emerges in the presence of asymmetry among spouses's types or in case of symmetry among mediumtypes spouses. Interestingly, lower divorce costs do not necessarily increase the probability of divorce. We provide some supporting evidence of our results and we discuss how this framework can help interpreting the effects of divorce reforms on divorce rates. 
Keywords:  nonstationary distribution, divorce cost, waiting cost. 
JEL:  J12 C78 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:frz:wpaper:wp2018_07.rdf&r=upt 