nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2018‒12‒24
eighteen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Approximate Expected Utility Rationalization By Federico Echenique; Taisuke Imai; Kota Saito
  2. Behavioral Economic Phenomena in Decision-Making for Others By Ifcher, John; Zarghamee, Homa
  3. Expectations-Based Loss Aversion in Common-Value Auctions: Extensive vs. Intensive Risk By Benjamin Balzer; Antonio Rosato
  4. Embezzlement and Guilt Aversion By Attanasi, Giuseppe; Rimbaud, Claire; Villeval, Marie Claire
  5. An Information-Theoretic Approach to Estimating Willingness To Pay for River Recreation Site Attributes By Henry, Miguel; Mittelhammer, Ron; Loomis, John
  6. Does Exposure to Unawareness Affect Risk Preferences? A Preliminary Result By Burkhard Schipper; Wenjun Ma
  7. Forecast heuristics, consumer expectations, and new-Keynesian macroeconomics: A horse race By Jang, Tae-Seok; Sacht, Stephen
  8. Qualitative analysis of common belief of rationality in strategic-form games By Giacomo Bonanno; Elias Tsakas
  9. Climatic Roots of Loss Aversion By Galor, Oded; Savitskiy, Viacheslav
  10. Habits as Adaptations: An Experimental Study By Matyskova, Ludmila; Rogers, Brian; Steiner, Jakub; Sun, Keh-Kuan
  11. From forward to spot prices: producers, retailers and loss averse consumers in electricity markets By Valeria Di Cosmo; Elisa Trujillo-Baute
  12. A characterization of lexicographic preferences By Goswami, Mridu Prabal; Mitra, Manipushpak; Sen, Debapriya
  13. Macroeconomic dynamics under bounded rationality: On the impact of consumers' forecast heuristics By Jang, Tae-Seok; Sacht, Stephen
  14. Information Costs and Sequential Information Sampling By Benjamin Hébert; Michael Woodford
  15. Behavioral Aspects of the Regulator's Actions By Pavlova, Natalia (Павлова, Наталья); Shastitko, Anastasia (Шаститко, Анастасия)
  16. Giving once, giving twice: A two-period field experiment on intertemporal crowding in charitable giving By Adena, Maja; Huck, Steffen
  17. Gain-Loss Framing in Interdependent Choice By Susann Fiedler; Adrian Hillenbrand
  18. A Model of Competing Narratives By Eliaz, Kfir; Spiegler, Ran

  1. By: Federico Echenique; Taisuke Imai; Kota Saito
    Abstract: We propose a new measure of deviations from expected utility, given data on economic choices under risk and uncertainty. In a revealed preference setup, and given a positive number e, we provide a characterization of the datasets whose deviation (in beliefs, utility, or perceived prices) is within e of expected utility theory. The number e can then be used as a distance to the theory. We apply our methodology to three recent large-scale experiments. Many subjects in those experiments are consistent with utility maximization, but not expected utility maximization. The correlation of our measure with demographics is also interesting, and provides new and intuitive findings on expected utility.
    Keywords: expected utility, revealed preferences
    JEL: D01 D81
    Date: 2018
  2. By: Ifcher, John (Santa Clara University); Zarghamee, Homa (Barnard College)
    Abstract: We examine whether biases identified in the behavioral-economics literature apply in decision-making for others (DMfO). We conduct a laboratory experiment in which subjects make decision on behalf of themselves and others in eighteen tasks that measure the following biases: present-bias in time preferences, reflection effect in risk preferences, ambiguity aversion, decoy effect, anchoring bias, endowment effect, and identifiable-victim bias. In our experiment, DMfO is DMfO simpliciter: unincentivized decisions made by one individual on behalf of another - the individual making decisions faces no direct costs or benefits when engaging in DMfO (as they would in a principal-agent framework or with bequest motives), and DMfO is not framed as giving advice or guessing behavior. We identify the following self-other discrepancies: (i) willingness to pay is higher in DMfO than in decisions for oneself in tasks associated with the anchoring bias, endowment effect, and identifiable-victim bias; and (ii) the propensity to give uninterpretable responses is higher in DMfO than in decisions for oneself. We also find order effects, with DMfO more similar to decisions for oneself when it follows them. Lastly, in response to open-ended items soliciting self-reports of their DMfO, most subjects report having followed some version of the "Golden Rule" (e.g., deciding for others as they would for themselves) or having tried to maximize the other subject's payment or utility; very few subjects report motivations that can be construed as rivalrous.
    Keywords: decisions making for others, laboratory experiments, social preferences, anchoring bias, endowment effect, identifiable-victim bias
    JEL: D90
    Date: 2018–11
  3. By: Benjamin Balzer (Economics Discipline Group, University of Technology Sydney); Antonio Rosato (Economics Discipline Group, University of Technology Sydney)
    Abstract: We analyze the behavior of expectations-based loss-averse bidders in frist-price and second-price common-value auctions. Highlighting the distinction between the uncertainty bidders face over whether they win the auction (extensive risk) and that over the value of the prize conditional on winning (intensive risk), we show that loss-averse bidders react differently to these different kinds of risk. In particular, the intensive risk pushes bidders to behave less aggressively in a common-value environment compared to one with private values. Yet, despite this "precautionary biddinging" effect, in equilibrium bidders can be exposed to the "winner's curse". We consider two alternative specifcations for how bidders assess outcomes as either gains or losses. Under narrow bracketing, bidders experience gains and losses separately over whether they receive the prize and how much they pay. Under broad bracketing, instead, bidders assess gains and losses over their net surplus. With narrow bracketing, first-price auctions expose bidders to less intensive risk and yield a higher expected revenue than second-price auctions, while the opposite result might hold with broad bracketing.
    Keywords: Reference-Dependent Preferences; Loss Aversion; Common-Value Auctions; Winner?s Curse
    JEL: D03 D44 D81 D82
    Date: 2018–10–18
  4. By: Attanasi, Giuseppe (University of Nice Sophia-Antipolis); Rimbaud, Claire (University of Lyon 2); Villeval, Marie Claire (CNRS, GATE)
    Abstract: Psychological game theory can contribute to renew the analysis of unethical behavior by providing insights on the nature of the moral costs of dishonesty. We investigate the moral costs of embezzlement in situations where donors need intermediaries to transfer their donations to recipients and where donations can be embezzled before they reach the recipients. We design a novel three-player Embezzlement Mini-Game to study whether intermediaries in the laboratory suffer from guilt aversion and whether guilt aversion affects the decision to embezzle. We show that the proportion of guilt-averse intermediaries is the same irrespective of the direction of guilt and guilt aversion reduces embezzlement. Structural estimates indicate no difference in the effect of guilt aversion toward the donor and toward the recipient on intermediaries' behavior. This is striking as embezzlement affects the earnings of the recipient but not those of the donor. It shows that guilt aversion matters even when decisions have no direct monetary consequences.
    Keywords: embezzlement, dishonesty, guilt aversion, psychological game theory, experiment
    JEL: C91
    Date: 2018–11
  5. By: Henry, Miguel; Mittelhammer, Ron; Loomis, John
    Abstract: This study applies an information theoretic econometric approach in the form of a new maximum likelihood-minimum power divergence (ML-MPD) semi-parametric binary response estimator to analyze dichotomous contingent valuation data. The ML-MPD method estimates the underlying behavioral decision process leading to a person’s willingness to pay for river recreation site attributes. Empirical choice probabilities, willingness to pay measures for recreation site attributes, and marginal effects of changes in some explanatory variables are estimated. For comparison purposes, a Logit model is also implemented. A Wald test of the symmetric logistic distribution underlying the Logit model is rejected at the 0.01 level in favor of the ML-MPD distribution model. Moreover, based on several goodness-of-fit measures we find that the ML-MPD is superior to the Logit model. Our results also demonstrate the potential for substantially overstating the precision of the estimates and associated inferences when the imposition of unknown structural information is not accounted explicitly for in the model. The ML-MPD model provides more intuitively reasonable and defensible results regarding the valuation of river recreation than the Logit model.
    Keywords: Minimum power divergence, contingent valuation, binary response models, information theoretic econometrics, river recreation
    JEL: C14 C5 Q5
    Date: 2018–01
  6. By: Burkhard Schipper; Wenjun Ma (Department of Economics, University of California Davis)
    Abstract: One fundamental assumption often made in the literature on unawareness is that risk preferences are invariant to changes of awareness. We study how exposure to unawareness affects choices under risk. Participants in our experiment choose repeatedly between varying sure outcomes and a lottery in 3 phases. All treatments are exactly identical in phase 1 and phase 3, but differ in phase 2. There are five different treatments pertaining to the lottery faced in phase 2: The control treatment (i.e., a standard lottery), the treatment with awareness of unawareness of lottery outcomes but known number of outcomes, the treatment with awareness of unawareness of outcomes but with unknown number of outcomes, the treatment with unawareness of unawareness of some outcomes, and the treatment with an ambiguous lottery. We study both whether behavior differs in phase 3 across treatments (between subjects effect) and whether differences of subjects' behavior between phases 1 and phase 3 differs across treatments (within subject effects). We observe no significant treatment effects.
    Keywords: Unawareness, Awareness of unawareness, Risk aversion, Experiments
    JEL: C91 C92 D81 D87
    Date: 2017–05–01
  7. By: Jang, Tae-Seok; Sacht, Stephen
    Abstract: This study extends the hybrid version of the baseline New-Keynesian model with heterogeneous agents who may adopt various forecast heuristics. With a focus on consumer expectations, we identify the most appropriate pairs of forecast heuristics that can lead to an equivalent fit to the data compared with the model specification under rational expectations. The competing specifications are estimated using the simulated method of moments. Our empirical results suggest that expectations under bounded rationality in the United States are grounded on consumers' emotional state, while for the Euro Area they are technical in nature. This observation questions the need for a hybrid model specification under rational expectations.
    Keywords: Consumer Expectations,Forecast Heuristics,New-Keynesian Model,Simulated Method of Moments
    JEL: C53 D83 E12 E21 E32
    Date: 2018
  8. By: Giacomo Bonanno; Elias Tsakas (Department of Economics, University of California Davis)
    Abstract: We study common belief of rationality in strategic-form games with ordinal utilities, employing a model of qualitative beliefs. We characterize the three main solution concepts for such games, viz., Iterated Deletion of Strictly Dominated Strategies (IDSDS), Iterated Deletion of Boergers-dominated Strategies (IDBS) and Iterated Deletion of Inferior Strategy Profiles (IDIP), by means of gradually restrictive properties imposed on the models of qualitative beliefs. As a corollary, we prove that IDIP refines IDBS, which refines IDSDS.
    Keywords: Qualitative likelihood relation, ordinal payoffs, common belief of rationality, iterative deletion procedures
    JEL: C7
    Date: 2017–05–11
  9. By: Galor, Oded; Savitskiy, Viacheslav
    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 O10 O40 Z10
    Date: 2018–11
  10. By: Matyskova, Ludmila; Rogers, Brian; Steiner, Jakub; Sun, Keh-Kuan
    Abstract: Psychologists emphasize two aspects of habit formation: (i) habits arise when the history of a decision process correlates with optimal continuation actions, and (ii) habits alleviate cognition costs. We ask whether serial correlation of optimal actions alone induces habits or if, instead, habits form as optimal adaptations. We compare lab treatments that differ in the information provided to subjects, holding fixed the serial correlation of optimal actions. We find that past actions affect behavior only in the treatment in which this habit is useful. The result suggests that caution is warranted when modeling habits via a fixed utility over action sequences.
    Keywords: Habit formation; rational inattention
    JEL: C91 D8 D9
    Date: 2018–11
  11. By: Valeria Di Cosmo (Economic and Social Research Institute, Dublin & Fondazione Enrico Mattei, Milan); Elisa Trujillo-Baute (Chair of Energy Sustainability, Universitat de Barcelona & Institut d’Economia de Barcelona (IEB))
    Abstract: The benefits of smoothing demand peaks in the electricity market has been widely recognised. European countries such as Spain and some of the Scandinavian countries have recently given to the consumers the possibility to face the spot prices instead of having a fixed tariffs determined by retailers. This paper develops a theoretical model to study the relations between risk averse consumers, retailers and producers, both in the spot and in the forward markets when consumers are able to choose between fixed tariffs and the wholesale prices. The model is calibrated on a real market case - Spain - where since 2014 spot tariffs were introduced beside the flat tariffs for household consumers. Finally, simulations of agents behavior and markets performance, depending on consumers risk aversion and the number of producers, are used to analyse the implications from the model. Our results show that the quantities the retailers and the producers trade in the forward market are positively related with the loss aversion of consumers. The quantities bought by the retailers in the forward market are negatively related with the skewness of the spot prices. On the contrary, quantity sold forward by producers are positively related with the skewness of the spot prices (high probability of getting high prices increase the forward sale) and with the total market demand. In the spot market, the degree of loss aversion of consumers determine the quantity the retailers buy in the spot market but does not have a direct effect on the spot prices.
    Keywords: Electricity Spot Market, Electricity Forward Market, Risk Aversion
    JEL: D40 L11 Q41
    Date: 2018
  12. By: Goswami, Mridu Prabal; Mitra, Manipushpak; Sen, Debapriya
    Abstract: This paper characterizes lexicographic preferences over alternatives that are identified by a finite number of attributes. We say two alternatives are 'totally different' if they are different with respect to every attribute. Our characterization is based on two key concepts: a weaker notion of continuity called 'mild continuity' (strict preference order between any two totally different alternatives is preserved around their small neighborhoods) and an 'unhappy set' (any alternative outside the set is preferred to all alternatives inside).
    Keywords: lexicographic preference; mild continuity; unhappy set; inclusion of marginally improved alternatives; preference nonreversibility
    JEL: C00 D01
    Date: 2018–12–14
  13. By: Jang, Tae-Seok; Sacht, Stephen
    Abstract: In this study, we analyze the macroeconomic dynamics under various shocks in two competing frameworks. Given the baseline New-Keynesian model, we compare the impulse response functions that stem from the hybrid version under rational expectations with the ones obtained in the forward-looking version under bounded rationality. For the latter, we assume heterogeneous agents who may adopt various forecast heuristics. We seek to understand which framework mimics real-world adjustments well and is therefore most suitable to describe economic adjustments over the business cycle.
    Keywords: Bounded Rationality,Consumer Expectations,Forecast Heuristics,Impulse Response Functions,New-Keynesian Model
    JEL: C53 D83 E12 E21 E32
    Date: 2018
  14. By: Benjamin Hébert; Michael Woodford
    Abstract: We propose a new approach to modeling the cost of information structures in rational inattention problems, the "neighborhood-based" cost functions. These cost functions have two properties that we view as desirable: they summarize the results of a sequential evidence accumulation problem, and they capture notions of "perceptual distance." The first of these properties is connected to an extensive literature in psychology and neuroscience, and the second ensures that neighborhood-based cost functions, unlike mutual information, make accurate predictions about behavior in perceptual experiments. We compare the implications of our neighborhood-based cost functions with those of a mutual-information cost function in a series of applications: security design, global games, modeling perceptual judgments, and a linear-quadratic-Gaussian tracking problem.
    JEL: D83
    Date: 2018–11
  15. By: Pavlova, Natalia (Павлова, Наталья) (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Shastitko, Anastasia (Шаститко, Анастасия) (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The findings of many studies in behavioral economics led to a wide dissemination of an opinion that the problem of the effects of limited rationality in the markets can be solved through the proper development of menu of options available to the consumer. The development of such a menu is the obligation of regulators. However, the question arises: to what extent regulators, in turn, are limitedly rational, and are motivated to create optimal methods that ensure the maximum level of welfare, given that their development is costly. This paper systematizes the main forms of limited rationality that can influence the adoption of Decisions by regulators. Based on the analysis, an attempt has been made to answer the two Questions: 1) is there a need and an opportunity to take into account the limited rationality of civil servants in modeling the actions of the regulator and 2) whether development of Special practical measuresis is required for leveling the revealed effects.
    Keywords: Behavioral economics, cognitive errors, state regulation, incentives of civil servants
    Date: 2017–05
  16. By: Adena, Maja; Huck, Steffen
    Abstract: We study intertemporal crowding between two fundraising campaigns for the same charitable organization by manipulating donors’ beliefs about the likelihood of future campaigns in two subsequent field experiments. The data shows that initial giving is decreasing in the likelihood of a future campaign while subse-quent giving increases in initial giving. While this refutes the predictions of a simple expected utility model, the pattern is in line with a model that allows for (anticipated or unanticipated) habit formation provided that donations in the two periods are substitutes.
    Keywords: Charitable giving,field experiments,intertemporal crowding
    JEL: C93 D64 D12
    Date: 2018
  17. By: Susann Fiedler (Max Planck Institute for Research on Collective Goods); Adrian Hillenbrand (Max Planck Institute for Research on Collective Goods)
    Abstract: Framing influences choice. However, little is known about the underlying mechanisms behind framing effects. We study gain-loss framing in binary modified dictator games. Subjects choose the selfish option more often in the loss frame compared to the gain frame. Recording visual fixations with eye-tracking, we find that dictators focus more on their own outcomes when facing losses. This suggests that losses to the own outcome are weighted more than losses to another player.
    Date: 2018–12
  18. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: We formalize the argument that political disagreements can be traced to a "clash of narratives". Drawing on the "Bayesian Networks" literature, we model a narrative as a causal model that maps actions into consequences, weaving a selection of other random variables into the story. An equilibrium is defined as a probability distribution over narrative-policy pairs that maximizes a representative agent's anticipatory utility, capturing the idea that public opinion favors hopeful narratives. Our equilibrium analysis sheds light on the structure of prevailing narratives, the variables they involve, the policies they sustain and their contribution to political polarization.
    Keywords: Anticipatory Utility; model misspecification; narratives; Polarization; Political Competition
    Date: 2018–11

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