|
on Utility Models and Prospect Theory |
|
Issue of 2018‒12‒17
twenty papers chosen by |
| By: | Mira Frick (Cowles Foundation, Yale University); Ryota Iijima (Cowles Foundation, Yale University); Tomasz Strzalecki (Harvard University) |
| Abstract: | We provide an axiomatic analysis of dynamic random utility, characterizing the stochastic choice behavior of agents who solve dynamic decision problems by maximizing some stochastic process (U_t) of utilities. We show ?rst that even when (U_t) is arbitrary, dynamic random utility imposes new testable restrictions on how behavior across periods is related, over and above period-by-period analogs of the static random utility axioms: An important feature of dynamic random utility is that behavior may appear history dependent, because past choices reveal information about agents’ past utilities and (U_t) may be serially correlated; however, our key new axioms highlight that the model entails speci?c limits on the form of history dependence that can arise. Second, we show that when agents’ choices today influence their menu tomorrow (e.g., in consumption-savings or stopping problems), imposing natural Bayesian rationality axioms restricts the form of randomness that (U_t) can display. By contrast, a speci?cation of utility shocks that is widely used in empirical work violates these restrictions, leading to behavior that may display a negative option value and can produce biased parameter estimates. Finally, dynamic stochastic choice data allows us to characterize important special cases of random utility—in particular, learning and taste persistence—that on static domains are indistinguishable from the general model. |
| Keywords: | Dynamic stochastic choice, Random utility, History dependence, Serially correlated utilities, Consumption persistence, Learning |
| JEL: | D81 D83 D90 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2092r&r=upt |
| By: | Carlos Alós-Ferrer; Ernst Fehr; Netzer Nick |
| Abstract: | The ability to uncover preferences from choices is fundamental for both positive economics and welfare analysis. Overwhelming evidence shows that choice is stochastic, which has given rise to random utility models as the dominant paradigm in applied microeconomics. However, as is well known, it is not possible to infer the structure of preferences in the absence of assumptions on the structure of noise. This makes it impossible to empirically test the structure of noise independently from the structure of preferences. Here, we show that the difficulty can be bypassed if data sets are enlarged to include response times. A simple condition on response time distributions (a weaker version of first-order stochastic dominance) ensures that choices reveal preferences without assumptions on the structure of utility noise. Sharper results are obtained if the analysis is restricted to specific classes of models. Under symmetric noise, response times allow to uncover preferences for choice pairs outside the data set, and if noise is Fechnerian, even choice probabilities can be forecast out of sample. We conclude by showing that standard random utility models from economics and standard drift-diffusion models from psychology necessarily generate data sets fulfilling our sufficient condition on response time distributions. |
| Keywords: | revealed preference, random utility models, response times |
| JEL: | D11 D81 D83 D87 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7333&r=upt |
| By: | Ray, M.; Maredia, M.; Shupp, R. |
| Abstract: | This paper examines the role of individual risk preferences in the decision of a climate smart technology in two northern states of India. We conducted a household survey and a field experiment using real cash with Indian farmers to elicit their risk preferences, and used them to explain their adoption of laser land leveler. The analysis extended the measurement of risk preferences beyond the expected utility theory to incorporate prospect theory. We use duration analysis approach to model the time to adoption and find that risk averse farmers and farmers who overvalue smaller probabilities adopt his technology sooner than others. Acknowledgement : We are really thankful to strengthening Impact Assessment in the CGIAR and Michigan State University's Asian Study Center for thier generous funding for this study. |
| Keywords: | Research and Development/ Tech Change/Emerging Technologies |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277502&r=upt |
| By: | Awondo, S.; Datta, G. |
| Abstract: | This study investigated the performance of Actual Production History (APH), a farm level crop insurance plan, vis- a-vis Area Yield Production (AYP), an area level crop insurance, as a farm risk management tool. We estimated actuarially fair premiums and trigger probabilities under both plans using a two-step hierarchical Bayes small area estimator. Certainty equivalent revenues based on a risk averse utility function were derived under three insurance choice scenario (APH, AYP, no insurance) with and without actual Federal subsidies. Finally, we derived the performance of each alternative plan with regards to the other following a pair-wise comparison of certainty equivalent revenues. Results suggest that unobserved factors other than basis risk and farmers risk preference drive preferences for crop insurance contracts. Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277265&r=upt |
| By: | Holden, S.T.; Quiggin, J. |
| Abstract: | Limited use of fertilizer by African farmers has been a major source of policy concern in Africa. This study assesses the fertilizer adoption responses of food insecure farmers in Malawi. A field experiment, eliciting risk attitudes of farmers, is combined with a detailed farm household survey. A state-contingent production model with rank-dependent utility preferences is estimated. Over-weighting of small probabilities was associated with less use of fertilizer on all maize types and particularly so on the more risky improved maize types. Acknowledgement : |
| Keywords: | Agricultural and Food Policy |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277355&r=upt |
| By: | Han Bleichrodt (Erasmus School of Economics, PO Box 1738, 3000 DR Rotterdam; Research School of Economics, Australian National University, Canberra, Australia); Christophe Courbage (Haute Ecole de Gestion de Genève, University of Applied Sciences Western Switzerland (HES-SO)); Béatrice Rey (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France) |
| Abstract: | The value of a statistical life (VSL) is a key parameter in the analysis of government policy. Most policy decisions are made under ambiguity. This paper studies the effect of changes in ambiguity perception on the value of a statistical life (VSL). We propose a definition of increases in ambiguity perception based on Ekern’s (1980) definition of increases in risk. Ambiguity aversion alone is not sufficient to lead to an increase in the VSL when the decision maker perceives more ambiguity. Our results highlight the importance of higher order ambiguity attitudes, particularly ambiguity prudence. |
| Keywords: | Value of a statistical life, ambiguity, prudence, smooth ambiguity model, neoadditive preferences |
| JEL: | D81 I18 Q51 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1832&r=upt |
| By: | Soham R. Phade; Venkat Anantharam |
| Abstract: | We show that, in a resource allocation problem, the ex ante aggregate utility of players with cumulative-prospect-theoretic preferences can be increased over deterministic allocations by implementing lotteries. We formulate an optimization problem, called the system problem, to find the optimal lottery allocation. The system problem exhibits a two-layer structure comprised of a permutation profile and optimal allocations given the permutation profile. For any fixed permutation profile, we provide a market-based mechanism to find the optimal allocations and prove the existence of equilibrium prices. We show that the system problem has a duality gap, in general, and that the primal problem is NP-hard. We then consider a relaxation of the system problem and derive some qualitative features of the optimal lottery structure. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1812.00501&r=upt |
| By: | John Ameriks; Gábor Kézdi; Minjoon Lee; Matthew D. Shapiro |
| Abstract: | This paper jointly estimates the relationship between stock share and expectations and risk preferences. The survey allows individual-level, quantitative estimates of risk tolerance and of the perceived mean and variance of stock returns. These estimates have economically and statistically significant association for the distribution of stock shares with relative magnitudes in proportion with the predictions of theories. Incorporating survey measurement error in the estimation model increases the estimated associations twofold, but they are still substantially attenuated being only about 5 percent of what benchmark finance theories predict. Because of the careful attention in the estimation to measurement error, the attenuation likely arises from economic behavior rather than errors in variables. |
| JEL: | C83 D81 D84 G11 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25269&r=upt |
| By: | Deepak Gupta (University School of Management Studies, Guru Gobind Singh Indraprastha University) |
| Abstract: | People, everday are inumdated with making decisions whether they are big or small. Cognitive psychology plays a major role in how people make their choices. Cognitive bias is known to have an effect on decision making. These biases are based on memory which create a systematic deviation in thinking and processing information. This paper aims to identify the effect of select cognitive biases i.e., Overconfidence bias, Endowment bias, Ambiguity Aversion bias and Recency bias on General Decision Making of a person as well as Financial Decision Making. The study also explores the differences and similarities in cognitive biases working during general decision making and financial decision making. For this, a self-administered questionnaire was used to collect data from 416 people and analysis and conclusions were drawn based on it. |
| Keywords: | Over confidence bias, Endowment bias, Ambiguity Aversion bias, Recency bias, Decision making, Financial Decision Making |
| JEL: | M00 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:7010051&r=upt |
| By: | Bart Smeulders |
| Abstract: | Kitamura and Stoye (2014) develop a nonparametric test for linear inequality constraints, when these are are represented as vertices of a polyhedron instead of its faces. They implement this test for an application to nonparametric tests of Random Utility Models. As they note in their paper, testing such models is computationally challenging. In this paper, we develop and implement more efficient algorithms, based on column generation, to carry out the test. These improved algorithms allow us to tackle larger datasets. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1812.01400&r=upt |
| By: | Laurens Cherchye; Thomas Demuynck; Bram De Rock; Mikhail Freer |
| Abstract: | We provide a revealed preference characterization of equilibrium behavior in first price sealed bid auctions. This defines testable conditions for equilibrium play that are intrinsically nonparametric, meaning that they do not require a non-verifiable specification of the individual utility functions. We characterize equilibrium play for a sequence of observations on private values and bids for a given individual. In a first step, we assume that the distribution of bids in the population is fully known. In a second step, we relax this assumption and consider the more realistic case that the empirical analyst can only use a finite number of i.i.d. observations drawn from the population distribution. We demonstrate the empirical usefulness ofour conditions through an illustrative application to an existing experimental data set of Neugebauer and Perote 2008. This application also shows the potential of our nonparametric characterization to study the behavioral phenomena learning and fatigue at the individual level. |
| Keywords: | first price auctions, equilibrium play, revealed preference characterization, testable implications, experimental data. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/279160&r=upt |
| By: | de Oliveira Souza, Thiago (Department of Business and Economics) |
| Abstract: | The equity premium–risk-free rate puzzle in standard consumption-based asset pricing models disappears once we remove the government-imposed component from the consumption expenditure series. I calibrate this component based on the growth rates of two proxies for government intervention, which I also show to forecast the short- and long-term equity premiums between 1974 (or 1981) and 2017. In summary, investors require large premiums to hold stocks because stocks give poor returns when government intervention increases, thereby systematically reducing individuals’ utility levels. |
| Keywords: | Equity premium puzzle; intervention; regulation; risk |
| JEL: | E10 G10 H10 |
| Date: | 2018–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sdueko:2018_008&r=upt |
| By: | De Marchi, E.; Cavaliere, A.; Banterle, A. |
| Abstract: | This paper aims at exploring consumers choice behavior for cisgenic vs conventional food alternatives focusing on how consumers process product attributes when the choice context involves cisgenic alternatives, and investigates the role of individual time preference in affecting choice behavior. The analysis is based on a Choice Experiment involving Attribute Non-Attendance and time preference is elicited through the Consideration of Future Consequences scale. The main results indicate that more than half of the sample population ignores the technology of production attribute while jointly considering the other product alternatives and stress the importance of time preferences in explaining heterogeneity in choice behavior. Acknowledgement : |
| Keywords: | Consumer/Household Economics |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277393&r=upt |
| By: | Gaetano Lisi (University of Cassino and Lazio Meridionale) |
| Abstract: | This paper reinterprets the neoclassical theory of labour supply by introducing job satisfaction into the utility function of the worker. This integration is feasible and also straightforward from a theoretical point of view and, furthermore, it produces interesting results. Precisely, this extended version of the standard model of labour supply can describe situations in which working produces utility beyond consumption, with the result that the disutility of giving up leisure time is lowered or even reversed. As a result, the paper is able to reconcile the standard theory of labour supply with the well-established finding of happiness research, according to which working could yield substantial non-monetary benefits. |
| JEL: | J28 J22 J24 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:csn:wpaper:2018-04&r=upt |
| By: | Oded Galor; Viacheslav Savitskiy |
| Abstract: | This research explores the origins of loss aversion and the variation in its prevalence across regions, nations and ethnic group. It advances the hypothesis and establishes empirically that the evolution of loss aversion in the course of human history can be traced to the adaptation of humans to the asymmetric effects of climatic shocks on reproductive success during the epoch in which subsistence consumption was a binding constraint. Exploiting regional variations in the vulnerability to climatic shocks and their exogenous changes in the course of the Columbian Exchange, the research establishes that consistent with the predictions of the theory, individuals and ethnic groups that are originated in regions marked by greater climatic volatility have higher predisposition towards loss-neutrality, while descendants of regions in which climatic conditions tended to be spatially correlated, and thus shocks were aggregate in nature, are characterized by greater intensity of loss aversion. |
| JEL: | D81 D91 Z10 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25273&r=upt |
| By: | Spiegel, A.; Britz, W.; Finger, R. |
| Abstract: | We propose a novel approach to capture risk and risk aversion for agricultural technology adoption by integrating second order stochastic dominance in a farm-level model based on real options. We employ an illustrative case study of perennial energy crop adoption. In our example, we found that risk aversion leads to smaller and earlier adoption of a new technology; in contrast, higher subjective riskiness increases expected scale and first slow down and then accelerate adoption. Those effects would have been obscured if technology adoption would have been considered as standing-alone or as now-or-never decision. Acknowledgement : |
| Keywords: | Risk and Uncertainty |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277421&r=upt |
| By: | Roos, Michael W. M. |
| Abstract: | In this paper, I propose a simple model in which behavior is determined by the individual's attitude towards the behavior and the attitude depends on the individual's values. The model is based on the Schwartz theory of human values, which is very prominent in social psychology. Values are desirable, transsituational, abstract goals. In the model, they fix aspiration levels for specific targets that are related to an object. The distance between the properties of an object and the aspiration levels determines the degree of the agent's satisfaction or dissatisfaction with the properties of the object. Attitude is the importance-weighted sum of the degrees of (dis-)satisfaction. The model highlights the importance of systematic and measurable heterogeneity among individuals and shows how values can predict differences in tastes and sensitivity to income and prices. The model also explains when Veblen effects occur. |
| Keywords: | values,attitudes,heterogeneity,Veblen effect,preferences,multiple attributes |
| JEL: | D01 D11 D91 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:777&r=upt |
| By: | Pascal Le Masson (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Armand Hatchuel (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Mario Le Glatin (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Benoit Weil (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This study examines how design theory enables us to extend decision-making logic to the "unknown," which often appears as the strange territory beyond the rationality of the decision-maker. We contribute to the foundations of management by making the unknown an actionable notion for the decision-maker. To this end, we build on the pioneering works in "managing in the unknown" and on design theory to systematically characterize rational forms of action to structure the exploration of the unknown from a decision-making perspective. We show that action consists of designing decisions in the unknown and can be organized on the basis of the notion of a "decision-driven design path," which is not yet a decision but helps to organize the generation of a better decision-making situation. Our decision-design model allows us to identify four archetypes of decision-driven design paths. Two involve generating "wishful decisions," either by improvement or by genericity, while the other two involve generating "decision-changing states" by generating a "best-choice hacking state" or an "all-decisions hacking state." These archetypes correspond to forms of collective action characterized by a specific strategy of knowledge acquisition, a specific performance, and specific organizations. In particular, they enable us to discuss the variety of known organizational forms that managers can rely on to explore the unknown. Le Masson, P., Hatchuel, A., Le Glatin, M., and Weil, B. (2018). "Designing decisions in the unknown: towards a generative decision model for management science." European Management Review, To be published, pp. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01937103&r=upt |
| By: | Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, Hamburg, Germany) |
| Abstract: | We study the incremental in- and out-of-sample predictive value of time-varying risk aversion for realized volatility of gold-price returns via extended heterogeneous autoregressive realized volatility (HAR-RV) models. Our findings suggest that time varying risk aversion possesses predictive value for gold volatility both in- and out-of-sample. The predictive power of risk aversion is robust to the inclusion of realized higher-moments, jumps, gold returns, leverage effect as well as the aggregate market volatility in the forecasting model. Interestingly, risk aversion is found to absorb in sample the predictive power of stock-market volatility at a short forecasting horizon, while out-of-sample results show that risk aversion adds to predictive value at a medium and long forecast horizon. Additional tests suggest that the short-run (long-run) out-of-sample predictive value of risk aversion is beneficial for investors who are more concerned about over-predicting (under-predicting) gold market volatility. Overall, our findings show that time-varying risk aversion captures information useful for predicting (bad, good) realized volatility not already contained in the other predictors, and allows more accurate out-of-sample forecasts to be computed at a medium and long forecast horizon. |
| Keywords: | Gold-price returns, Realized volatility, Forecasting |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201881&r=upt |
| By: | Stark, Oded; Jakubek, Marcin; Szczygielski, Krzysztof |
| Abstract: | We study the assimilation behavior of a group of migrants who live in a city populated by native inhabitants. We conceptualize the group as a community, and the city as a social space. Assimilation increases the productivity of migrants and, consequently, their earnings. However, assimilation also brings the migrants closer in social space to the richer native inhabitants. This proximity subjects the migrants to relative deprivation. We consider a community of migrants whose members are at an equilibrium level of assimilation that was chosen as a result of the maximization of a utility function that has as its arguments income, the cost of assimilation effort, and a measure of relative deprivation. We ask how vulnerable this assimilation equilibrium is to the appearance of a "mutant" - a member of the community who is exogenously endowed with a superior capacity to assimilate. If the mutant were to act on his enhanced ability, his earnings would be higher than those of his fellow migrants, which will expose them to greater relative deprivation. We find that the stability of the pre-mutation assimilation equilibrium depends on the cohesion of the migrants' community, expressed as an ability to effectively sanction and discourage the mutant from deviating. The equilibrium level of assimilation of a tightly knit community is stable in the sense of not being vulnerable to the appearance of a member becoming better able to assimilate. However, if the community is loose-knit, the appearance of a mutant will destabilize the pre-mutation assimilation equilibrium, and will result in a higher equilibrium level of assimilation. |
| Keywords: | Community cohesion,Social proximity,Interpersonal comparisons,Relative deprivation,Migrants' assimilation behavior |
| JEL: | D70 J15 J24 J61 J70 O12 Z10 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:112&r=upt |