nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2018‒04‒23
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. "Preferences for Randomization and Anticipated Utility" By Yosuke Hashidate
  2. A New Approach to Measure Preferences of Users in Built Environments: Integrating Cognitive Mapping and Utility Models By Benedict Dellaert; Theo Arentze; Oliver Horeni; Harry Timmermans
  3. Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions" By Gollier, Christian; Kimball, Miles S.
  4. A Not so Myopic Axiomatization of Discounting By Jean-Pierre Drugeon; Thai Ha-Huy
  5. Complementarity, Income, and Substitution: A U(C,N) Utility for Macro By Bilbiie, Florin Ovidiu
  6. A Model-Point Approach to Indifference Pricing of Life Insurance Portfolios with Dependent Lives By Christophette Blanchet-Scalliet; Diana Dorobantu; Yahia Salhi
  7. Pricing Sin Stocks: Ethical Preference vs. Risk Aversion By Giuliano Curatola; Stefano Colonnello; Alessandro Gioffré
  8. Indifference pricing of life insurance contracts via BSDEs under partial information By Claudia Ceci; Katia Colaneri; Alessandra Cretarola
  9. Evolution towards higher net profit in a population of ensembles of ensembles leads to division of labour By Friedrich, Thomas
  10. Who Divorces Whom and Why By Alessandro Tampieri; Elena Parilina

  1. 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 non-linear 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 probability-weighting 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
  2. 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 real-estate 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 pre-defined 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 so-called CNET method has similarities with means-end analysis. The cognitive mapping method does not impose restrictions on the number of attributes that can be included in the analysis. Furthermore, just as means-end 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; Random-utility-maximization models; Shopping location choice
    JEL: R3
    Date: 2017–07–01
  3. 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
  4. By: Jean-Pierre Drugeon (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - 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 Ha-Huy (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)
    Abstract: This article builds an axiomatization of inter-temporal trade-offs 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 decision-theory 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 pessimism-like 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
  5. By: Bilbiie, Florin Ovidiu
    Abstract: In business-cycle, macro models the elasticity of intertemporal substitution (EIS) governs the economy's response to demand shocks and policy changes ("multipliers"). With general non-separable preferences, the EIS is determined by consumption-hours complementarity and the income effect on hours. Complementarity helps generate business-cycle co-movement following demand shocks, fiscal multipliers, and allows reconciling low EIS with low income-wealth effects. Yet existing utility functions restrict either complementarity, or income effects---or both---and 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: business-cycle co-movement; consumption-hours complementarity; elasticity of intertemporal substitution; Fiscal multipliers; income and wealth effects; news shocks
    JEL: D11 E21 E62 H31
    Date: 2018–03
  6. By: Christophette Blanchet-Scalliet (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 [Saint-Étienne] - 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 [Saint-Étienne] - 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 mortality-contingent contracts wanted to acquire a second portfolio constituted of m individuals. The policyhold-ers' lifetimes in these portfolios are correlated with a Farlie-Gumbel-Morgenstern (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
  7. By: Giuliano Curatola; Stefano Colonnello; Alessandro Gioffré
    Abstract: We develop a model that reproduces the average return and volatility spread between sin and non-sin 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
  8. 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 so-called 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 quadratic-exponential backward stochastic differential equation.
    Date: 2018–03
  9. 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 cost-functions and saturating benefit-functions 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), Michaelis-Menten constants (Km) and the maximal reaction velocities (Vmax) in source and sink of the basic ensemble. Km and Vmax shape a saturating benefit-function in Michaelis-Menten 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 win-win 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
  10. 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 re-enter 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 medium-types 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: non-stationary distribution, divorce cost, waiting cost.
    JEL: J12 C78
    Date: 2018

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