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on Utility Models and Prospect Theory |
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Issue of 2018‒10‒01
fourteen papers chosen by |
| By: | Bahman Angoshtari; Tim Leung |
| Abstract: | We study the problem of dynamically trading a futures contract and its underlying asset under a stochastic basis model. We describe the basis evolution by a scaled Brownian bridge, but also incorporate the possibility of non-convergence at maturity. The optimal trading strategies are determined from a utility maximization problem under hyperbolic absolute risk aversion (HARA) risk preferences. By analyzing the associated Hamilton-Jacobi-Bellman equation, we derive the exact conditions under which the equation admits a solution and solve the utility maximization explicitly. A series of numerical examples are provided to illustrate the optimal strategies and examine the effects of model parameters. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.05961&r=upt |
| By: | Gauriot, Romain (University of Sydney); Heger, Stephanie A. (University of Sydney); Slonim, Robert (University of Sydney) |
| Abstract: | We challenge a commonly used assumption in the literature on social preferences and show that this assumption leads to significantly biased estimates of the social preference parameter. Using Monte Carlo simulations, we demonstrate that the literature's common restrictions on the curvature of the decision-makers utility function can dramatically bias the altruism parameter. We show that this is particularly problematic when comparing altruism between groups with well-documented differences in risk aversion or diminishing marginal utility, i.e., men versus women, giving motivated by pure versus warm glow motives, and wealthy versus poor. |
| Keywords: | altruism, marginal utility, biased inferences |
| JEL: | C91 D64 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11721&r=upt |
| By: | Keith Marzilli Ericson; Justin R. Sydnor |
| Abstract: | Insurance affects the variability of consumption over time, which is not captured in standard expected utility of wealth models. We develop a consumption-utility model that shows how liquidity constraints and borrowing costs impact the value of insurance. Liquidity constraints generate high insurance demand when premiums are due smoothly, sometimes leading to seemingly dominated choices. Conversely, a risk-averse person may value insurance below its expected value and appear risk loving when premiums are due in a single payment. Moreover, optimal insurance contracts take different forms with liquidity constraints. We show empirical insurance analysis using the standard model can generate misleading counterfactuals and welfare estimates. Finally, we demonstrate the model’s feasibility and importance with an application to evaluating cost-sharing reductions on the health insurance exchanges. |
| JEL: | D01 D81 G22 I13 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24993&r=upt |
| By: | Xingguang Chen |
| Abstract: | We study individual decision-making behavioral on generic view. Using a formal mathematical model, we investigate the action mechanism of decision behavioral under subjective perception changing of task attributes. Our model builds on work in two kinds classical behavioral decision making theory: "prospect theory (PT)" and "image theory (IT)". We consider subjective attributes preference of decision maker under the whole decision process. Strategies collection and selection mechanism are induced according the description of multi-attributes decision making. A novel behavioral decision-making called "ladder theory (LT)" is proposed . By real four cases comparing, our analysis shows that the LT have better explanation ability then PT and IT under some decision situations. Furthermore, we use our model to shed light on that the LT theory can cover PT and IT ideally. It is the enrichment and development for classic behavioral decision theory and it has positive theoretical value and instructive significance for explaining plenty of decision-making phenomenon,and it improve our understanding of how individual decision-making is performed actually. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.03442&r=upt |
| By: | Kim Weston; Gordan Zitkovic |
| Abstract: | We prove the global existence of an incomplete, continuous-time finite-agent Radner equilibrium in which exponential agents optimize their expected utility over both running consumption and terminal wealth. The market consists of a traded annuity, and, along with unspanned income, the market is incomplete. Set in a Brownian framework, the income is driven by a multidimensional diffusion, and, in particular, includes mean-reverting dynamics. The equilibrium is characterized by a system of fully coupled quadratic backward stochastic differential equations, a solution to which is proved to exist under Markovian assumptions. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.05947&r=upt |
| By: | Daniela Escobar; Georg Pflug |
| Abstract: | Distortion (Denneberg 1990) is a well known premium calculation principle for insurance contracts. In this paper, we study sensitivity properties of distortion functionals w.r.t. the assumptions for risk aversion as well as robustness w.r.t. ambiguity of the loss distribution. Ambiguity is measured by the Wasserstein distance. We study variances of distances for probability models and identify some worst case distributions. In addition to the direct problem we also investigate the inverse problem, that is how to identify the distortion density on the basis of observations of insurance premia. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.06592&r=upt |
| By: | LUO Chenghong, (CORE, Université catholique de Louvain); MAULEON Ana, (Université Saint-Louis Bruxelles and CORE); VANNETELBOSCH Vincent, (CORE, Université catholique de Louvain) |
| Abstract: | We study the formation of networks where myopic and farsighted individuals decide with whom they want to form a link, according to a distance-based utility function that weighs the costs and benefits of each connection. We propose the notion of myopic-farsighted stable set to determine the networks that emerge when some individuals are myopic while others are farsighted. A myopic-farsighted stable set is the set of networks satisfying internal and external stability with respect to the notion of myopic-farsighted improving path. In the case of a homogeneous population (either all myopic or all farsighted), a conflict between stability and efficiency is likely to arise. But, once the population becomes mixed, the conflict vanishes if there are enough farsighted individuals. In addition, we characterize the myopic-farsighted stable set for any utility function when all individuals are myopic. |
| Keywords: | networks, stable sets, myopic and farsighted players, distance-based utility |
| JEL: | A14 C70 D20 |
| Date: | 2018–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2018025&r=upt |
| By: | Weng, Weizhe; Morrison, Mark; Boyle, Kevin J.; Boxall, Peter C. |
| Keywords: | Environmental Economics and Policy, Land Economics/Use, Resource/Energy Economics and Policy |
| Date: | 2017–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea17:259179&r=upt |
| By: | Paulo Oliva; Philipp Zahn |
| Abstract: | Beginning with Herbert Simon [10], the literature on bounded rationality has investigated in great detail how internal limitations affect an agent's choice process. The structure of the choice environment, deemed as important as internal limitations by Simon [11], has been mostly ignored. We introduce a model of the environment and its interaction with an agent's choice process. Focusing on online environments where an agent can use filter and sort functionality to support his decision-making, we show, a choice process relying on the environment can be rationalized. Moreover, for sufficiently many alternatives, filtering and sorting are quick ways to choose rationally. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.06766&r=upt |
| By: | Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson |
| Abstract: | We study business cycle fluctuations in heterogeneous-agent general equilibrium models that feature both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services combined with idiosyncratic shocks generates operative extensive and intensive margins. We consider calibrated versions of this model that differ in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the salient features of the empirical distribution of hours worked, including how individuals transit within this distribution. We then study how the various specifications influence labor supply responses to aggregate technology shocks. We ask to what extent our predictions for business cycle fluctuations are affected by abstracting from the intensive margin and instead assuming that adjustment occurs only along the extensive margin. We find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small. |
| JEL: | E24 E32 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24985&r=upt |
| By: | Malakhov, Sergey |
| Abstract: | The model of equilibrium price dispersion examines the demand for cars through the optics of the demand for mileage where the asymmetry of information is produced by the odometer fraud. Theoretically, fraudsters can destroy the market as it is described by the “theorem of lemons”. But the market self-deactivation does not take place. The purchase of a car with regard to the demand for mileage represents a form of home production where driving like gardening and pets’ care provide a direct utility but is also something one can purchase on the market. At the margin nobody buys but everybody gets taxi. The increase in taxi price per mile raises the demand for good cars of taxi drivers and it makes rational for potential buyers to pay for taxi drivers expertize fee in order to choose a good car. The demand for good cars is restored at the new price level. The pessimistic scenario, however, doesn’t take place because good cars stay attractive. The equilibrium price of a mile establishes the direct relationship between marginal savings on purchase and the time horizon of the consumption-leisure choice. Great discounts provide potential buyers the additional information about short life cycle of vehicles like unexpected low price for beefsteak tells about its short shelf life. The equilibrium price of a mile describes also the trade-off between the purchase price and the costs of ownership. The marginal approach does not rely on the endowment effect. The choice between a good car and a bad car discovers the willingness to take care of good cars where the after-the-purchase costs of ownership per mile become greater than for a bad car. The willingness to take care of the big-ticket quality items reinforces the willingness to pay of potential buyers, and sellers of good cars do not quit the market. |
| Keywords: | : theorem of lemons, equilibrium price dispersion, optimal consumption-leisure choce, willingness to take care of big-ticket items |
| JEL: | D11 D83 |
| Date: | 2018–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88594&r=upt |
| By: | Weike Zhang; Jiang Du; Xiaoli Tian |
| Abstract: | Considering the risk aversion for gains and the risk seeking for losses of venture capitalists, the TODIM has been chosen as the decision-making method. Moreover, group decision is an available way to avoid the limited ability and knowledge etc. of venture capitalists.Simultaneously, venture capitalists may be hesitant among several assessed values with different probabilities to express their real perceptionbecause of the uncertain decision-making environment. However, the probabilistic hesitant fuzzy information can solve such problems effectively. Therefore, the TODIM has been extended to probabilistic hesitant fuzzy circumstance for the sake of settling the decision-making problem of venture capitalists in this paper. Moreover, due to the uncertain investment environment, the criteria weights are considered as probabilistic hesitant fuzzyinformation as well. Then, a case study has been used to verify the feasibility and validity of the proposed TODIM.Also, the TODIM with hesitant fuzzy information has been carried out to analysis the same case.From the comparative analysis, the superiority of the proposed TODIM in this paper has already appeared. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.00128&r=upt |
| By: | He, Yong |
| Abstract: | This study addresses state intervention in land pricing. Theoretical modelling identifies risk aversion as the determining factor for the coexistence of the visible and invisible hands. Our empirical tests using Chinese data confirm the absence of this coexistence. Exploring the micro-foundation of this “two-hand” model and extending the Lucas critique, we illustrate the impossibility of this coexistence under the land regime of state ownership in a market environment: state interference in land pricing causes people to drastically alter their expectations and neutralizes their risk aversion, leading to the deactivation of the stochastic discount factor and the market mechanism. This work provides a “risk aversion” approach to the causes of “state failure” and implies that under state ownership of land, the distortion of land prices is inevitable. |
| Keywords: | land pricing, state ownership of land, state failure, the Lucas critique, risk aversion. |
| JEL: | G12 H71 Q24 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88770&r=upt |
| By: | Perry, Edward; Hennessy, David A.; Moschini, GianCarlo |
| Keywords: | Institutional and Behavioral Economics, Marketing, Production Economics |
| Date: | 2017–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea17:259115&r=upt |