nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2019‒03‒18
seventeen papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The new models of decision in risk: A review of the critical literature By Trabelsi, Mohamed Ali
  2. Upper Bounds on Risk Aversion under Mean-variance Utility By Kevin Denny
  3. The Deadweight Loss of Social Recognition By Luigi Butera; Robert Metcalfe; William Morrison; Dmitry Taubinsky
  4. Using multiple reference levels in Multi-Criteria Decision aid: The Generalized-Additive Independence model and the Choquet integral approaches By Christophe Labreuche; Michel Grabisch
  5. Generalised Random Categorisation Rules By Matthew Ryan
  6. When Does Real Become Consequential in Non-hypothetical Choice Experiments? By Daniel E. Chavez; Marco A. Palma; Rodolfo M. Nayga Jr.
  7. A prospect-theory model of voter turnout By Oliver Herrmann; Richard Jong-A-Pin; Lambert Schoonbeek
  8. Demand and equilibrium with inferior and Giffen behaviors By Le Van, Cuong; Pham, Ngoc-Sang
  9. Risk aversion, patience and intelligence: evidence based on macro data By Niklas Potrafke
  10. Demand Cycles and Heterogeneous Conformity Preferences By Baumann, L.
  11. Modern tontine with bequest: innovation in pooled annuity products By Thomas Bernhardt; Catherine Donnelly
  12. Mixture models for consumers' preferences in healthcare By S. Capecchi; M. Meleddu; M. Pulina; G. Solinas
  13. Social Shock Sharing and Stochastic Dominance By Christophe Muller
  14. Endogenous Discounting, Wariness, and Effcient Capital Taxation By Aloisio Araujo; Juan Pablo Gamay; Rodrigo Novinskiz; Mario R. Pascoa
  15. The Heterogeneity Among Commodity-Rich Economies: Beyond the Prices of Commodities By Troug, Haytem
  16. Eine Open Banking Plattform für Deutschland: Eine zukunftsorientierte Alternative zu einer Fusion Deutsche Bank/Commerzbank By Brühl, Volker; Krahnen, Jan Pieter
  17. Recourse Loans and Ponzi Schemes By Mario R. Pascoa; Abdelkrim Seghir

  1. By: Trabelsi, Mohamed Ali
    Abstract: The aim of the risk decision theory is to describe the behavior of agents in the face of several random prospects. Since it is difficult to describe these preferences, we seek to represent them. The use of a representative function of preferences has been for a long time, the usual method of describing behavior in a random context. The obvious advantage of this method is that it allows including these data in a formalized model and, by extension, to understand the optimization process underlying any decision. The determination of the representative function of preferences must be based on an axiomatic basis. From these axioms, an accurate specification of the value function will be derived. The purpose of this article is to examine the history of theories that have sought to determine a satisfactory criterion for responding to the risk decision problem and to analyze the contribution of these models.
    Keywords: Risk Aversion, Expected Utility (EU), Rank Dependent Expected Utility (RDEU), Gamble
    JEL: C91 D81
    Date: 2019
  2. By: Kevin Denny
    Abstract: Based on a simple prior, this note derives upper bounds for the coefficient of absolute & relative risk aversion if utility can be written as depending linearly on the mean and variance of income.
    Keywords: Risk aversion; Mean-variance utility; Risk tolerance
    JEL: D80
    Date: 2019–02
  3. By: Luigi Butera; Robert Metcalfe; William Morrison; Dmitry Taubinsky
    Abstract: A growing body of empirical work shows that social recognition of individuals' behavior can meaningfully influence individuals’ choices. This paper studies whether social recognition is a socially efficient lever for influencing individuals’ choices. Because social recognition generates utility from esteem to some but disutility from shame to others, it can be either positive-sum, zero-sum, or negative-sum. This depends on whether the social recognition utility function is convex, linear, or concave, respectively. We develop a new revealed preferences methodology to investigate this question, which we deploy in a field experiment on promoting attendance to the YMCA of the Triangle Area. We find that social recognition increases YMCA attendance by 17-23% over a one-month period in our experiment, and our estimated structural models predict that it would increase attendance by 19-23% if it were applied to the whole YMCA of the Triangle Area population. However, we find that the social recognition utility function is significantly concave and thus generates deadweight loss. If our social recognition intervention were applied to the whole YMCA of the Triangle Area population, we estimate that it would generate deadweight loss of $1.23-$2.15 per dollar of behaviorally-equivalent financial incentives.
    JEL: D8 D9 H0 I0
    Date: 2019–03
  4. By: Christophe Labreuche (UMP CNRS/THALES - Unité mixte de physique CNRS/Thalès - THALES - CNRS - Centre National de la Recherche Scientifique); Michel Grabisch (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In many Multi-Criteria Decision problems, one can construct with the decision maker several reference levels on the attributes such that some decision strategies are conditional on the comparison with these reference levels. The classical models (such as the Choquet integral) cannot represent these preferences. We are then interested in two models. The first one is the Choquet with respect to a p-ary capacity combined with utility functions, where the p-ary capacity is obtained from the reference levels. The second one is a specialization of the Generalized-Additive Independence (GAI) model, which is discretized to fit with the presence of reference levels. These two models share common properties (monotonicity, continuity, properly weighted,.. .), but differ on the interpolation means (Lovász extension for the Choquet integral, and multi-linear extension for the GAI model). A drawback of the use of the Choquet integral with respect to a p-ary capacity is that it cannot satisfy decision strategies in each domain bounded by two successive reference levels that are completely independent of one another. We show that this is not the case with the GAI model.
    Keywords: Generalized Additive Independence,Multiple criteria analysis
    Date: 2018–06
  5. By: Matthew Ryan (School of Economics, Auckland University of Technology)
    Abstract: Aguiar's (2017) random categorisation rule (RCR) describes random choice behaviour as the maximisation of a linear preference order over the intersection of a random consideration set with the set of available options. A key axiom in Aguiar's (2017) characterisation of the RCR is an acyclicity condition on a revealed preference relation derived from the random choice function. We show that this condition may be substantially weakened - to asymmetry of the revealed preference relation - without jeopardising the essence of the RCR representation. In our generalisation of the RCR, preferences may be ill-behaved on subsets of alternatives that are never considered together. While these pathologies in preference are masked by the decision-maker's selective attention to an particular choice problem, they may still be revealed by data across di§erent choice problems. Finally, we show that the generalised model remains within the random utility class.
    Date: 2019–02
  6. By: Daniel E. Chavez (University of Kentucky, Department of Marketing and Supply Chain); Marco A. Palma (Texas A&M University, Department of Agricultural Economics); Rodolfo M. Nayga Jr. (University of Arkansas, Department of Agricultural Economics and Agribusiness)
    Abstract: The proneness of stated preference methods to hypothetical bias has increased the popularity of incentivized studies, in particular the use of real choice experiments (RCE). Challenges of RCE include the lack of engagement with the choice task by some subjects, and that some of the product alternatives may not be available in order to incentivize all the choices. This issue brings to question whether the proportion of available products influences the results of the RCE. Would the subjects' engagement change? Using an induced value choice experiment with a profit maximization optimal strategy for agents, we varied the number of potentially binding alternatives in four treatments. Our results suggest that incentives matter, as the percentage of optimal choices was lowest in the hypothetical treatment. Interestingly, however, we do not find statistically significant differences in the number of optimal choices between the incentivized treatments, regardless of the number of potentially binding alternatives used in our treatments. This suggests that practitioners could conduct incentivized RCE without the need to have all the product alternatives be made available in the study. Furthermore, we explore the interaction of incentives with subjects' numerical ability and individual reflective state. Both are also shown to influence how incentives impact performance, shedding some light on what individual characteristics to look for when conducting valuation research.
    Keywords: Choice Experiments, Eye Tracking, Hypothetical bias, Induced values.
    JEL: C91 C18
  7. By: Oliver Herrmann; Richard Jong-A-Pin; Lambert Schoonbeek
    Abstract: We incorporate prospect-theory preferences in a game-theoretic model to study voter turnout. We show that voter turnout is heavily affected by agents having subjective reference points with respect to the vote or abstain decision and their subjective probability weighting in the decision-making process. Using empirically based parameter values, we show that our model has lower prediction error than other game-theoretic models with standard expected-utility preferences. We also find that our model maintains desirable comparative statics effects and leads to higher turnout predictions in larger electorates.
    Keywords: voting behavior, Downsian paradox, prospect-theory preferences
    JEL: D72
    Date: 2019
  8. By: Le Van, Cuong; Pham, Ngoc-Sang
    Abstract: We introduce a class of differentiable, strictly increasing, strictly concave utility functions exhibiting an explicit demand of a good which may have Giffen behavior. We provide a necessary and sufficient condition (bases on prices and consumers’ preferences and income) under which this good is normal, inferior or Giffen good. Interestingly, with this utility, the equilibrium price of a good may increase in the aggregate supply for this good.
    Keywords: Inferior good, Giffen good, equilibrium price.
    JEL: D11 D51
    Date: 2019–03–12
  9. By: Niklas Potrafke
    Abstract: Using the new macro data on risk aversion and patience by Falk et al. (2018), I show that risk aversion and patience are related to intelligence: high-IQ populations are more patient and more risk averse than low-IQ populations. The correlation between patience and intelligence corroborates previous results based on micro data. Intelligent people tend to be patient because they have long time horizons. The correlation between risk aversion and intelligence supports new micro data studies based on dynamically optimized sequential experimentation (Chapman et al. 2018).
    Keywords: risk aversion, patience, intelligence
    JEL: D00 D81 D90
    Date: 2019
  10. By: Baumann, L.
    Abstract: The paper analyzes the dynamics of demand for three options when agents differ in their preferences for conformity. Each agent seeks to imitate others who are more individualistic and to distinguish herself from others who are more conformist, relative to herself. In each period, every agent chooses her utility-maximizing option given each agent's demand in the previous period. It is shown that for a large class of initial demand distributions, demand dynamics resemble fashion cycles: Total demand for each option over time is wave-like, and, when positively demanded, an option trickles through the entire population, from individualistic towards conformist agents.
    Keywords: fashion cycle, demand cycle, conformity, individuality, dynamics, distribution of demand
    JEL: C73 D11 D91 E21 E32 Z13
    Date: 2019–03–06
  11. By: Thomas Bernhardt; Catherine Donnelly
    Abstract: We introduce a new pension product that offers retirees the opportunity for a lifelong income and a bequest for their estate. Based on a tontine mechanism, the product divides pension savings between a tontine account and a bequest account. The tontine account is given up to a tontine pool upon death while the bequest account value is paid to the retiree's estate. The values of these two accounts are continuously re-balanced to the same proportion, which is the key feature of our new product. Our main research question about the new product is what proportion of pension savings should a retiree allocate to the tontine account. Under a power utility function, we show that more risk averse retirees allocate a fairly stable proportion of their pension savings to the tontine account, regardless of the strength of their bequest motive. The proportion declines as the retiree becomes less risk averse for a while. However, for the least risk averse retirees, a high proportion of their pension savings is optimally allocated to the tontine account. This surprising result is explained by the least risk averse retirees seeking the potentially high value of the bequest account at very old ages.
    Date: 2019–03
  12. By: S. Capecchi; M. Meleddu; M. Pulina; G. Solinas
    Abstract: This paper aims to explain preferences behaviour by a sample of Sardinia residents with respect to combined choice of attributes related to cardiology services. The rating of proposed cards, containing a combination of several attributes to qualify the services, are examined in terms of intrinsic components and main drivers to determine the ordinal choice - location, screening mode, cost, waiting time for the visit and subjects' covariates. The topic is relevant in telemedicine as experienced in Sardinia, a region with a mobility and a socio-economic disadvantage. The innovative approach allows for effective visual support to interpret and compare results and it is useful also to predict the respondents' profile with respect to their individual characteristics. Empirical evidence supports policy interventions and suggests the usefulness of the implemented statistical procedure.
    Keywords: E-health Preferences;Discrete modelling;Decision drivers;CUB models
    Date: 2019
  13. By: Christophe Muller (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: Since the seminal paper of Atkinson and Bourguignon (1982), little decisive progress has been achieved in developing empirically efficient stochastic dominance criteria for multidimensional social welfare analysis. By proposing new axioms of 'Social Shock Sharing', this paper provides new intuitive justifications to imposing sign restrictions on partial derivatives of individual von Neumann-Morgenstern utility functions. These new breakthrough findings are exploited to derive necessary and sufficient stochastic dominance criteria for multidimensional social welfare comparisons, up to the sixth order, at least. Equivalent results are derived in terms of multidimensional poverty conditions. Empirically powerful discriminatory criteria are obtained by combining all social shock sharing axioms up to some high order and by deriving a dimension reduction property. An application to Egypt at the beginning of the XXIst century demonstrates the practical substantial gain in discriminating power of the approach by revealing a unambiguous continual improvement in bivariate income-education social welfare over the studied period.
    Keywords: multidimensional welfare, stochastic dominance, temperance, risk sharing
    JEL: D3 D63 I31
    Date: 2019–01
  14. By: Aloisio Araujo (IMPA and FGV EPGE); Juan Pablo Gamay (IMPA); Rodrigo Novinskiz (Faculdades Ibmec); Mario R. Pascoa (University of Surrey)
    Abstract: When the discount factors that infinite lived consumers use at each date are not predetermined but are instead chosen within some set, depending on what the consumption plan is, impatience might not hold. More precisely, if the utility is the infimum of discounted utilities over that set of discount factor sequences, then preferences may be just upper semi-impatient. Such lack of lower semi-impatience, which we refer to as wariness, consists in neglecting distant gains but not distant losses. Examples are the precautionary case (a concern with the worst lifetime outcome) and the habit persistence case (a concern with a fall in living standards). The implementation of efficient allocations by trading assets sequentially requires taxes that avoid excessive savings by raising the opportunity of cost of saving up to the point of matching the marginal benefit of dishoarding at distant dates. Taxes on equilibrium plans are zero in many contexts.
    JEL: D53 E40 E41 G10
    Date: 2019–03
  15. By: Troug, Haytem
    Abstract: The existing literature has always assumed that commodity-rich countries are a homogeneous group, resulting in the generalisation of any findings obtained from a single commodity-rich economy. This paper proposes a small open economy model for a commodity-rich country and studies the triggers of business cycles for four different commodity-rich economies to highlight the existence of heterogeneity among commodity-rich economies. The model introduces government consumption in a non-separable form to the utility function. Commodities have a central role in private consumption, production of final goods, and windfalls for the domestic government. We feed the model with a variety of shocks that were previously proposed by the previous literature. The estimations of the model show that oil-rich economies are more vulnerable to external shocks than their commodity-rich counterparts. This is mainly the result of the size of commodity windfalls in the economy, as the share of oil revenues are significantly higher than the revenues of other commodities, as a ratio of output. The results also show that there exists a policy crowding out effect of fiscal policy to monetary policy in oil-rich economies, all explaining the choice of an exchange rate peg regime in most oil-rich economies.
    Keywords: New Keynesian models, Business Cycle, Open Economy Macroeconomics, Joint Analysis of Fiscal and Monetary Policy, Commodity Prices.
    JEL: E12 E32 E63 F41
    Date: 2019–02–14
  16. By: Brühl, Volker; Krahnen, Jan Pieter
    Abstract: In diesem explorativen Beitrag machen wir uns Gedanken über die Zukunft von Deutscher Bank und Commerzbank, und entwickeln einen neuen Zugang zu dem Thema: Statt einer Fusion von DB und CB schlagen wir eine Teilfusion nur des Datenzentren vor - es entsteht auf diese Weise die Grundlage für eine Open Banking Platform als Utility, also als Betrieb im Eigentum der Nutzer, an der perspektivisch weitere Finanzinstitute teilnehmen können. Die über die Daten kooperierenden Institute bleiben mit Blick auf Produkte und Dienstleistungen unverändert Konkurrenten - "national champions" entstehen auf diese Weise nicht. Aber es wird damit in Europa die Basis für einen erfolgsversprechenden Wettbewerb mit den grossen Datenplattformen aus USA und China (Facebook, Amazon, Alipay) gelegt, die früher oder später in den Finanzmarkt eindringen werden. Das von vorgeschlagene Modell einer offenen Datenplattformen für Banken verhindert das Entstehen von "National Champions" und schützt damit auch das Kernanliegen der Bankenunion: Die Schaffung eines Finanzsystems, dessen Banken jede für sich ausscheiden können ohne eine systemische Krise auszulösen, und ohne den Steuerzahler zu einer Rettungsaktion zu zwingen.
    Keywords: Open Banking Platform Germany,Bankenunion,Fusion,Deutsche Bank,Commerzbank
    Date: 2019
  17. By: Mario R. Pascoa (University of Surrey); Abdelkrim Seghir (Ajman University)
    Abstract: Non-recourse borrowing leaves no room for Ponzi schemes, as shown by Araujo, Pascoa and Torres-Martinez (2002). This is not the case with recourse loans, for which, in the event of default and on top of the foreclosure of the collateral, the debtor's estate can be seized or (in a way common in the GE literature) the debtor can suffer utility penalties. We focus on the latter and show that infinite horizon equilibrium with recourse exists in some interesting cases: (i) if utility penalties are low enough and the collateral does not yield utility (for example, when it is a productive asset or a security) or (ii) for a nominal promise backed by real collateral (such as mortgages, whose payments are not tied to a commodity price index). No-trade equilibria with unduly repayment beliefs may not always be trivially found and a refinement can be designed to eliminate outcomes with spurious beliefs.
    JEL: D52 D53 G33
    Date: 2019–03

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