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on Utility Models and Prospect Theory |
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Issue of 2018‒06‒11
eight papers chosen by |
| By: | Daniel Danau (Normandie Univ, UNICAEN, CNRS, CREM, F-14000 Caen, France) |
| Abstract: | We investigate the properties of the preference of an individual for an unknown pro t π(x) over a certain pro t π(E(x)), where x is unknown at the time when the decision is made, whereas its expected value E(x) is known. The additional bene t to the individual of the former over the latter consists in a flexibility gain. For instance, a flexibility gain arises in investment decisions when the individual obtains a higher bene t if she postpones the investment until after some technology x is realized, rather than making it today with technology E(x). We show that prudence (positive third derivative of the utility function) is related to the size of the flexibility gain, in the same vein as it is related to the utility premium of an individual who prefers a certain pro t π to a variable pro t π + Ɛ͂, where E(Ɛ͂) = 0. We further examine the way in which the concept of flexibility gain is linked to a variety of notions and problems, namely downside risk aversion, concave surplus of a risk neutral individual, stochastic dominance, optimal prevention, and principal-agent relationships with unknown distribution of some relevant variable. This permits to highlight the role of the degree of absolute prudence (or of the third derivative of the surplus function, when the individual is risk neutral) in decision making. |
| Keywords: | Prudence; Flexibility gain; Utility premium; Downside risk aversion |
| JEL: | D81 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:2018-05&r=upt |
| By: | Sanjit Dhami; Mengxing Wei; Ali al-Nowaihi |
| Abstract: | We consider a theoretical model of a public goods game that incorporates reciprocity, guilt-aversion/surprise-seeking, and the attribution of intentions behind these emotions. In order to test our predictions, we implement the ‘induced beliefs method’ and a within-subjects design, using the strategy method. We find that all our psychological variables contribute towards the explanation of contributions. Guilt-aversion is pervasive at the individual-level and the aggregate-level and it is relatively more important than surprise-seeking. Our between-subjects analysis confirms the results of the within-subjects design. |
| Keywords: | public goods games, psychological game theory, reciprocity, surprise-seeking/guilt-aversion, attribution of intentions, induced beliefs method, within and between subjects designs |
| JEL: | D01 D03 H41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7014&r=upt |
| By: | Xu, Yilong (University of Heidelberg); Xu, Xiaogeng (Dept. of Economics, Norwegian School of Economics and Business Administration); Tucker, Steven (Waikato Management School, University of Waikato) |
| Abstract: | We study whether people’s ambiguity attitudes differ when deciding for themselves or for others in the loss domain. We find no systematic differences in ambiguity attitudes between self- and other-regarding decision-making. Our results are consistent with the loss part of the fourfold pattern of ambiguity attitudes. |
| Keywords: | Ambiguity attitudes; Decision-making for others; Losses and uncertainty |
| JEL: | C91 D81 |
| Date: | 2018–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2018_011&r=upt |
| By: | Carey Caginalp; Gunduz Caginalp |
| Abstract: | Optimization methods are used to determine equilibria of investment in cryptocurrencies. The basic assumptions involve existence of a core group (the "wealthy") that fears the loss of substantial assets through government seizure. Speculators constitute another group that tends to introduce volatility and risk for the wealthy. The wealthy must divide their assets between the home currency and the cryptocurrency, while the government decides on the probability of seizing a fraction the assets of this group. Under the assumption that each group exhibits risk aversion through a utility function, we establish the existence and uniqueness of Nash equilibrium. Also examined is the more realistic optimization problem in which the government policy cannot be reversed, while the wealthy can adjust their allocation in reaction to the government's designation of probability. The methodology leads to an understanding the equilibrium market capitalization of cryptocurrencies. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1805.10128&r=upt |
| By: | Dongshuang Hou (Department of Applied Mathematics, Northwestern Polytechnical University); Aymeric Lardon (Université Côte d'Azur, France; GREDEG CNRS); Panfei Sun (Department of Applied Mathematics, Northwestern Polytechnical University); Theo Driessen (Department of Applied Mathematics, University of Twente, The Netherlands) |
| Abstract: | The main purpose of this article is to introduce two new values for transferable utility (TU) games: the upper and lower optimal complaint values. These are based on two kinds of per capita complaint criteria and each involve a lower and upper bound of the core. In the spirit of the nucleolus, these two values are obtained by lexicographically minimizing a maximal complaint vector associated with each of the per capita complaint criterion. Interestingly, the upper and lower optimal complaint values respectively coincide with the Equal Allocation of Non-Separable Contributions and the Center-of-Gravity of Imputation Set Value for a large class of TU-games. Moreover, a characterization of these two values is achieved by invoking the equal upper and lower maximal per capita complaint properties together with efficiency. |
| Keywords: | Cooperative game, optimal complaint values, equalitarian values, equal maximal per capita complaint properties |
| JEL: | C71 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2018-13&r=upt |
| By: | F. Javier Martínez-de-Albéniz (Universitat de Barcelona); Carlos Rafels (Universitat de Barcelona); Neus Ybern (Universitat Politècnica de Catalunya) |
| Abstract: | We analyze assortative assignment games, introduced in Becker (1973) and Eriksson et al. (2000). We study the extreme core points and show an easy way to compute them. We find a natural solution for these games. It coincides with several well-known point solutions, the median stable utility solution (Schwarz and Yenmez, 2011) and the nucleolus (Schmeidler, 1969).We also analyze the behavior of the Shapley value. We finish with some extensions, where some hypotheses are relaxed. |
| Keywords: | Assortative market, Assignment game, core, nucleolus. |
| JEL: | C71 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ewp:wpaper:376web&r=upt |
| By: | Velde, Francois R. (Federal Reserve Bank of Chicago) |
| Abstract: | In the 18th century Britain frequently issued lottery loans, selling bonds whose size was determined by a draw soon after the sale. The probability distribution was perfectly known ex-ante and highly skewed. After the draw the bonds were identical (except for size) and indistinguishable from regular bonds. I collect market prices for the lottery tickets and show that investors were paying a substantial premium to be exposed to this purely artificial risk. I show that investors were well-to-do and included many merchants and bankers. I turn to cumulative prospect theory to make sense of these observations and estimate the equilibrium model of Barberis and Huang (2008). The preference parameters can account for the level of the lottery premium but cannot always match the systematic rise of prices over the course of the draws. |
| Keywords: | Lotteries; behavioral finance; cumulative prospect theory; Great Britain; government debt |
| JEL: | D81 G12 N13 |
| Date: | 2018–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2018-07&r=upt |
| By: | von Wangenheim, Jonas (Humboldt University Berlin) |
| Abstract: | I derive a social planner\'s optimal information design in an environment with quasi-hyperbolic discounting consumers without commitment. Consumption induces instantaneous utility, but unknown delayed cost. Consumers may or may not acquire additional costless information on the cost parameter. The planner\'s optimal signal can be interpreted as an incentive compatible consumption recommendation whenever the cost parameter is below some cut-off. Welfare strictly exceeds the one under full information. I characterize distributional conditions under which welfare attains first best. |
| Keywords: | bayesian persuasion; present bias; hyperbolic discounting; rational inattention; |
| JEL: | D01 D18 D62 D82 |
| Date: | 2018–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:98&r=upt |