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on Utility Models and Prospect Theory |
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Issue of 2019‒01‒28
ten papers chosen by |
| By: | Mark Schneider (University of Alabama) |
| Abstract: | Discounted Expected Utility theory has been a workhorse in economic analysis for over half a century. However, it cannot explain empirical violations of `dimensional independence' demonstrating that risk interacts with time preference and time interacts with risk preference, nor does it explain present bias or magnitudedependence in risk and time preferences, or correlations between risk preference, time preference, and cognitive reection. We demonstrate that these and other anomalies are explained by a dual system model of risk and time preferences that unies models of a rational economic agent, models based on prospect theory, and dual process models of decision making. |
| Keywords: | Risk; Time; Dimensional Independence |
| JEL: | D01 D03 D81 D90 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:18-18&r=all |
| By: | Harin, Alexander |
| Abstract: | A theorem, applied mathematical method and qualitative mathematical models are introduced in the present article. The method and models are based on the forbidden zones of the theorem and suppose that people decide as if there were some biases of the expectations of measurement data, e.g., under influence of noise. The article is motivated by the need for theoretical support for the practical analysis that was performed for the purposes of behavioral economics. |
| Keywords: | variance; expectation; noise; bias; measurement; utility; prospect theory; behavioral economics; psychology; social sciences; |
| JEL: | C02 C1 D8 D81 D84 |
| Date: | 2019–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:91368&r=all |
| By: | Nicole El Karoui (LPSM UMR 8001 - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique); Mrad Mohamed (LAGA - Laboratoire Analyse, Géométrie et Applications - UP8 - Université Paris 8 Vincennes-Saint-Denis - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - Institut Galilée - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | In the present paper, we are interested in the forward-looking inverse problem, where the observable are a so-called characteristic process $X^c$ and an initial utility function $U (0, .) = u(.)$. The recovery process is a dynamic (eventually random) utility performance $U$. The main result is a necessary and sufficient condition for the existence of a utility performance process $U$ satisfying $U (t, X^c_t (x))$ is a martingale for any initial starting point $x$. Examples of applications are developed in the last section to support our approach in the special case of finance and economics: the first example concerns an aggregation problem, the second one a Markov equilibrium. |
| Date: | 2018–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01966312&r=all |
| By: | Karina Doorley; Arnaud Dupuy; Simon Weber |
| Abstract: | This note investigates the extent to which structural estimates of marital surplus are informative about subjective well-being and separation. We first estimate the marital surplus using a simple matching model of the marriage market with perfectly transferable utility and heterogeneity in tastes applied to a rich German panel dataset. We then show that these estimates of the marital surplus are negatively correlated with separation and the difference in spouses’ subjective satisfaction. |
| Keywords: | Matching market, marital surplus, subjective well-being, separation |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp995&r=all |
| By: | Brice Magdalou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier) |
| Abstract: | We establish an equivalence theorem between (i) dominance of one society by another, according to a finite sequence of social welfare improving transfers and (ii) dominance according to a class of social welfare functions, in the following framework: individual outcomes are multidimensional but finitely divisible in each dimension, a distribution simply counts the number of individuals having each possible outcome, and the considered set of transfers has the structure of a discrete cone. This framework encompasses most of the social welfare improving transfers investigated in the literature such as, for instance, Pigou-Dalton progressive transfers. As by-products, our model sheds new light on some surprising results in the literature on social deprivation, and provides new arguments on the key role of the expected utility model in decision-making under risk. |
| Keywords: | welfare-improving transfers,stochastic dominance.,inequality,social welfare |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01975452&r=all |
| By: | Lacaze, María Victoria; González, Julia |
| Abstract: | This paper evaluates the effect on market shares and consumer surplus of the introduction of a Good Agricultural Practices (GAP)-labeled product in the frozen fried potatoes (FFP) industry. We first estimate a model of household demand in Mar del Plata, Argentina, using scanner data and demographic information. We find that higher income individuals are more concerned about health and nutrition, and that younger and lower-income consumers are more price-sensitive. Then we postulate that a properly GAP-labeled FFP is available in the market, and we assess its effect by using the estimated utility function and prior information about consumers' declared willingness to pay (WTP) for sustainably produced potatoes. We find that the older the individual, the greater the influence of the hypothetical introduction of the GAP-labeled product; the relationship is less conclusive in the case of income. Finally, we predict the results of a greater consumer surplus extraction by fixing a higher price for the new product, and we calculate the maximum increase in the marginal cost that the firm would be able to afford if farmers charge higher prices for GAP fresh potatoes. |
| Keywords: | Buenas Prácticas Agrícolas; Alimentos Congelados; Papa; Disposición a Pagar; Modelo de Elección Discreta; |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:2976&r=all |
| By: | Yu Zhou; Shigehiro Serizawa |
| Abstract: | We investigate an assignment market where multiple objects are assigned, together with associated payments, to a group of agents with unit demand preferences. Preferences over bundles, the pairs of (object, payment), accommodate income effects. Among all (Walrasian) equilibria in such a market, there is one supported by the coordinate-wise minimum prices, the minimum price equilibrium (MPE). We propose a price adjustment process, "the Serial Vickrey process," that finds an MPE in a finite number of steps. The Serial Vickrey process introduces objects one by one, and on the basis of the structural properties of MPE, the "Serial Vickrey sub-process" sequentially finds an MPE for k+1 objects by using an MPE for k objects. In the Serial Vickrey process, instead of revealing the whole preference, each agent only reports finitely many "indifference prices." We also discuss the application of the Serial Vickrey process to calibrate agents' utility functions in the quantitative analysis of housing market research in the assignment model. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1047&r=all |
| By: | Giudo De Blasio; Maria De Paola; Vincenzo Scoppa; Samuele Poy (Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF, Università della Calabria) |
| Abstract: | This paper investigates the impact of risk attitudes on the decision to become an entrepreneur. In contrast to previous research, we handle endogeneity issues relying on an instrumental variables strategy considering as a source of exogenous variation in risk aversion the early exposure to a massive earthquake. Using several waves of the Bank of Italy Survey of Household Income and Wealth (SHIW), we find that individuals experimenting an earthquake become significantly more risk averse. Second-stage estimates show that risk aversion has a significant negative impact on the probability of becoming an entrepreneur. |
| Keywords: | Entrepreneurship, Risk Attitudes, Natural Disasters, Instrumental Variables |
| JEL: | D81 D91 L26 C36 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:clb:wpaper:201901&r=all |
| By: | Mickaël Beaud (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Mathieu Lefebvre (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique); Julie Rosaz (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper investigates if and how other-regarding preferences governing giving decisions in dictator games are affected in risky environments in which the payoff of the recipient is random. We demonstrate that, whenever the risk is actuarially neutral, the donation of dictators with a purely ex post view of fairness should, in general, be affected by the riskyness of the recipient's payoff, while dictators with a purely ex ante view should not be. Our experimental data show no statistically significant impact of the recipient's risk exposure on dictators' giving decisions and, therefore, give weak empirical support to the purely ex post view of fairness. This result appears to be robust to both the experimental design (within or between subjects) and to the origin of the recipient's risk exposure (chosen by the recipient or imposed to the recipient). |
| Keywords: | inequality aversion,impure altruism,background risk,ex ante and ex post views of fairness,laboratory experiments dictator games,otherregarding preferences |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01954928&r=all |
| By: | Kate Farrow (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Gilles Grolleau (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier, CEREN - Centre de Recherche sur l'ENtreprise [Dijon] - BSB - Burgundy School of Business (BSB) - Ecole Supérieure de Commerce de Dijon Bourgogne (ESC)); Lisette Ibanez (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier) |
| Abstract: | Social norm interventions represent a low-cost and effective policy tool that have been shown to generate behaviour change in a number of contexts. We investigate whether valence framing impacts the effectiveness of a social norm intervention on prosocial behaviour. We use Amazon Mechanical Turk in conjunction with oTree to conduct an experiment in which we manipulate descriptive beliefs and original endowments in the context of a dictator game. We find that the impact of a social norm intervention appears to be significantly greater in a frame of negative valence vs. a frame of positive valence. Loss aversion and positional preferences could play a role in these findings. Regression results furthermore indicate a differences in the determinants of allocation decisions across frames, suggesting that normative beliefs matter more in a positive frame, whereas descriptive beliefs matter more in a negative frame. This work contributes to a better understanding of framing effects as well as the conditions under which normative considerations are most salient. On a practical level, it points to an opportunity for policymakers to substantially improve upon the design of social norm interventions |
| Keywords: | social information,social norms,behavioral intervention,framing |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01954927&r=all |