
on Utility Models and Prospect Theory 
By:  John Duffy; Janet Hua Jiang; Huan Xie 
Abstract:  We study the trade of indefinitelylived assets in experimental markets. The traded prices of these assets are on average more than 40% below the riskneutral fundamental value under the expected utility assumption. We examine the effects of three interrelated factors for the traded price, payoff uncertainty about the asset’s dividend payments, horizon uncertainty about the duration of trade, and the expected utility assumption. Our results suggest that horizon uncertainty does not significantly affect the traded price. Incorporating risk aversion into nonexpected utility models with recursive preferences and probability weighting can rationalize the low prices observed in our indefinitehorizon asset markets. 
Keywords:  Asset Pricing,Behavioral Finance,Experiments,Indefinite Horizon,Random Termination,Risk and Uncertainty,Expected Utility,EpsteinZin Recursive Preferences,Probability Weighting, 
JEL:  C91 C92 D81 G12 
Date:  2019–07–29 
URL:  http://d.repec.org/n?u=RePEc:cir:cirwor:2019s15&r=all 
By:  Jean Baccelli (MCMP  Munich Center for Mathematical Philosophy, IHPST  Institut d'Histoire et de Philosophie des Sciences et des Techniques  UP1  Université PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique  DEC  Département d'Etudes Cognitives  ENS Paris  ENS Paris  École normale supérieure  Paris) 
Abstract:  Statedependent utility is a problem for the behavioral branch of decision theory under uncertainty. It questions the very possibility that beliefs be revealed by choice data. According to the current literature, all models of beliefs are equally exposed to the problem. Moreover, the problem is solvable only when the decisionmaker can influence the resolution of uncertainty. This paper gives grounds to reject these two views. The various models of beliefs can be shown to be unequally exposed to the problem of statedependent utility. The problem can be argued to be solved even when the decisionmaker has no influence over the resolution of uncertainty. The implications of such reappraisal for a philosophical appreciation of the revealed preference methodology are discussed. 
Date:  2019–06–27 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal02172207&r=all 
By:  Carlos AlósFerrer; Michele Garagnani 
Abstract:  Overwhelming evidence from the cognitive sciences shows that, in simple discrimination tasks (determining what is louder, longer, brighter, or even which number is larger) humans make more mistakes and decide more slowly when the stimuli are closer along the relevant scale. We investigate to what extent these effects are relevant for economic decisions. Strikingly, we find that even when there is an objectively correct answer independently of attitudes toward risk, the same effects obtain as expected values become closer. Contrary to pure discrimination tasks, however, differences in payoffindependent numerical magnitudes play a minor role. When correct answers depend on subjective attitudes toward risk, differences in expected values fail to explain error rates. The gradual effects on error rates and response times subsist but are instead explained by cardinal differences in independentlyestimated subjective utilities (“strength of preference”). This is in agreement with assumptions typically made (but seldom validated) in random utility models. We conclude that the gradual effects on choice found in cognitive discrimination paradigms are very much present in economic choices, but depend on purely economic variables. An implication is that even if correct economic choices can be seen as ordinal, actual economic choices carry a cardinal component. 
Keywords:  Strength of preference, choice difficulty, stochastic choice, risk attitude 
JEL:  D9 D01 D81 
Date:  2019–07 
URL:  http://d.repec.org/n?u=RePEc:zur:econwp:330&r=all 
By:  David M. Kreps; Walter Schachermayer 
Abstract:  We examine Kreps' (2019) conjecture that optimal expected utility in the classic BlackScholesMerton (BSM) economy is the limit of optimal expected utility for a sequence of discretetime economies that "approach" the BSM economy in a natural sense: The $n$th discretetime economy is generated by a scaled $n$step random walk, based on an unscaled random variable $\zeta$ with mean zero, variance one, and bounded support. We confirm Kreps' conjecture if the consumer's utility function $U$ has asymptotic elasticity strictly less than one, and we provide a counterexample to the conjecture for a utility function $U$ with asymptotic elasticity equal to 1, for $\zeta$ such that $E[\zeta^3] > 0.$ 
Date:  2019–07 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1907.11424&r=all 
By:  Géraldine Bocqueho (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); Marc Deschamps (UBFC  Université Bourgogne FrancheComté [COMUE]); Jenny Helstroffer (UL  Université de Lorraine); Julien Jacob (UL  Université de Lorraine); Majlinda Joxhe (University of Luxembourg) 
Abstract:  This paper uses the experimental setup of Tanaka et al. (2010) to measure refugees' risk preferences. A sample of 206 asylum seekers was interviewed in 201718 in Luxembourg. Contrary to studies which focus on risk aversion in general, we analyze its components using a cumulative prospect theory (CPT) framework. We show that refugees exhibit particularly low levels of risk aversion compared to other populations and that CPT provides a better fit for modelling risk attitudes. Moreover, we include randomised temporary treatments provoking emotions and find a small significant impact on probability distortion. Robustness of the Tanaka et al. (2010) experimental framework is confirmed by including treatments regarding the embedding effect. Finally, we propose a theoretical model of refugee migration that integrates the insights from our experimental outcomes regarding the functional form of refugees' decision under risk and the estimated parameter values. The model is then simulated using the data from our study. 
Keywords:  refugee migration,risk preferences,experimental economics,cumulative prospect theory,psychological priming 
Date:  2018 
URL:  http://d.repec.org/n?u=RePEc:hal:wpaper:hal02198118&r=all 
By:  Yuki SHIGETA 
Abstract:  This study examines a gain/loss asymmetric utility in continuous time in which the investor discounts their utility gain by more than the utility loss. By employing the theory of stochastic di erential utility, the model allows a timevariable sub jective discount rate. In addition, the model can express various forms of utility functions including a version of the Epstein{Zin utility. Under the model, the opti mal consumption/wealth ratio and portfolio weight have di erent functional forms depending on whether the state variables stay in some region. 
Keywords:  Gain/Loss Asymmetry, Stochastic Di erential Utility, Consumption{Investment Problem 
JEL:  G11 
Date:  2019–08 
URL:  http://d.repec.org/n?u=RePEc:kue:epaper:e19004&r=all 
By:  Jean Baccelli (MCMP  Munich Center for Mathematical Philosophy, IHPST  Institut d'Histoire et de Philosophie des Sciences et des Techniques  UP1  Université PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique  DEC  Département d'Etudes Cognitives  ENS Paris  ENS Paris  École normale supérieure  Paris) 
Abstract:  In this paper, I investigate the betting behavior of a decisionmaker who can influence the likelihood of the events upon which she is betting. In decision theory, this is best known as a situation of moral hazard. Focusing on a particularly simple case, I sketch the first systematic analysis of moral hazard in the canonical Savage framework. From the results of this analysis, I draw two philosophical conclusions. First, from an observational and a descriptive point of view, there need to be no incompatibility between moral hazard and the Savage framework. This qualifies the incompatibility view, that is ubiquitous in decision theory. Second, in general, moral hazard is not sufficient to overcome the challenges posed by statedependent utility to the behavioral identification of beliefs. This qualifies the sufficiency view, that is influential in decision theory. These two philosophical conclusions are the main contributions of my paper. 
Date:  2019–03–16 
URL:  http://d.repec.org/n?u=RePEc:hal:journl:hal02172242&r=all 
By:  Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium) 
Abstract:  I examine the eﬀect of ﬁscal policy at the zero lower bound if households have preferences over safe assets (POSA) calibrated consistent with evidence on household savings behavior and individual discount rates, and empirical estimates of the eﬀect of the supply of US government debt on government bond yields. POSA attenuate the eﬀect of changes in the household’s permanentincome on her consumption today and implies a wealth eﬀect from government bonds. It therefore strongly increases the multiplier of a permanent expenditure change, moving it much closer to the multiplier of temporary expenditure changes. The result becomes even stronger with credit constrained households and ﬁrms. 
Keywords:  Fiscal multiplier of temporary and persistent expenditure changes, Zero lower bound, wealth in the utility function 
JEL:  E52 E62 E32 
Date:  2019–07 
URL:  http://d.repec.org/n?u=RePEc:nbb:reswpp:201907374&r=all 
By:  Jianjun Miao (Boston University); Dongling Su 
Abstract:  We propose a noisy rational expectations equilibrium model of asset markets with rationally inattentive investors. We extend the literature to incorporate any finite number of assets with arbitrary correlation. We also do not restrict the signal form and show that investors optimality choose a single signal, which is a noisy linear combination of all risky assets. This generates comovement of asset prices and contagion of shocks, even when asset payoffs are negatively correlated. The model also provides testable predictions of the impact of risk aversion, aggregate risk, and information capacity on the security market line, the portfolio dispersion, and the abnormal return. 
Keywords:  Rational Inattention, Information Choice, Asset Pricing, Portfolio Choice 
JEL:  D82 G11 G12 
Date:  2019–07 
URL:  http://d.repec.org/n?u=RePEc:bos:wpaper:wp2019009&r=all 
By:  Juan M. Londono; Nancy R. Xu 
Keywords:  Variance risk premium, downside variance risk premium, international stock markets, asymmetric state variables, stock return predictability 
JEL:  F36 G12 G13 G15 
Date:  2019–07–19 
URL:  http://d.repec.org/n?u=RePEc:fip:fedgif:1247&r=all 
By:  Philippe Jehiel (PJSE  Paris Jourdan Sciences Economiques  UP1  Université PanthéonSorbonne  ENS Paris  École normale supérieure  Paris  INRA  Institut National de la Recherche Agronomique  EHESS  École des hautes études en sciences sociales  ENPC  École des Ponts ParisTech  CNRS  Centre National de la Recherche Scientifique, PSE  Paris School of Economics, UCL  Department of Medical Physics and Biomedical Engineering  UCL  University College of London [London]); Jakub Steiner (UZH  University of Zürich [Zürich], CERGEEI  Charles University [Prague]) 
Abstract:  A memoryless agent can acquire arbitrarily many signals. After each signal observation, she either terminates and chooses an action, or she discards her observation and draws a new signal. By conditioning the probability of termination on the information collected, she controls the correlation between the payo_ state and her terminal action. We provide an optimality condition for the emerging stochastic choice. The condition highlights the bene_ts of selective memory applied to the extracted signals. Implicationsobtained in a simple class of binary problems include (i) confirmation bias, (ii) speedaccuracy complementarity, (iii) overweighting of rare events, and (iv) salience effect. 
Keywords:  bounded rationality,information processing,stochastic choice,confirmation bias,speedaccuracy complementarity,probability weighting,salience 
Date:  2019–07 
URL:  http://d.repec.org/n?u=RePEc:hal:psewpa:halshs02183450&r=all 
By:  KenIchi Akao (School of Social Sciences, Waseda University, 161 Nishiwaseda Shinjuku Tokyo, 1698050, Japan.); Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University, Japan.); Kazuo Nishimura (Research Institute for Economics and Business Administration, Kobe University, Japan.) 
Abstract:  The critical capital stock is a threshold that appears in a nonconcave growth model, such that any optimal capital path from a stock level below (above) the threshold converges to a lower (higher) steady state. It explains historydependent development and provides an implication for the achievement of sustainable development. The threshold is rarely an optimal steady state and thus it is hard to characterize. In a continuous time growth model with a convexconcave production function, we show that: a) the critical capital stock is continuous and increasing in the discount rate; b) as the discount rate increases, the critical capital stock appears from the zero stock level and disappears at a stock level between those of the maximum average and maximum marginal productivities; c) at this upper bound, the critical capital stock coalesces with the higher optimal steady state; d) once the critical capital stock disappears, the higher steady state is no longer an optimal steady state; and e) the critical capital stock at the upper bound can be arbitrarily close to either the stock level of the maximum average productivity or that of the maximum marginal productivity, depending on the curvature of the utility function. 
Keywords:  Continuous time growth model, convex?concave production function, critical capital stock 
JEL:  C61 D90 O41 
URL:  http://d.repec.org/n?u=RePEc:was:dpaper:1906&r=all 
By:  Berentsen, Aleksander; Markheim, Marina 
Abstract:  Peertopeer lending platforms are increasingly important alternatives to traditional forms of credit intermediation. These platforms attract projects that appeal to socially motivated investors. There are high hopes that these novel forms of credit intermediation improve ﬁnancial inclusion and provide better terms for borrowers. To study these hopes, we introduce altruistic investors into a peertopeer model of credit intermediation where the terms of the loans are determined through bilateral bargaining. We ﬁnd that altruistic investors do not improve ﬁnancial inclusion in the sense that all projects that are ﬁnanced by altruistic investors are also ﬁnanced by rational investors. Altruistic investors oﬀer, however, better borrowing conditions in the sense that the borrowing rates with altruistic investors are always lower in comparison to the ones obtained with rational investors. Furthermore, investors with strong altruistic preferences are willing to ﬁnance projects which generate an expected ﬁnancial loss. We also introduce joint liability contracts and we ﬁnd that they increase borrowing rates and have no eﬀects on the surpluses of borrowers and investors. Finally, for a certain range of parameters the model’s allocation is observationally equivalent to a model with rational investors that have low bargaining power. Outside of this range, the model generates equilibrium allocations that are not incentive feasible in a model with rational investors which is interesting from the point of view of pure bargaining theory. 
Keywords:  altruistic preferences, ﬁnancial intermediation, ﬁnancial inclusion, peertopeer platforms, joint liability 
JEL:  D4 G0 O1 
Date:  2019–07 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:94963&r=all 
By:  Solms, Mark 
Abstract:  In his paper Emotion and reasoning in human decisionmaking (Economics Discussion Papers, No 20198) Edmund Rolls points out that multiple and independent types of reinforcement exist in the human brain, and that they cannot be reduced to a common currency. The present commentary introduces nonspecialist readers to this wide variety of reinforcers, each of which carries equal biological value. The evolutionary forces underwriting them reveal much about the causes of our apparently irrational choices  which is why it is important for economists to acquaint themselves with such things. 
Keywords:  decisionmaking,brain mechanisms,basic emotions,reward value,economicvalue,dominance hierarchies,macroeconomics,microeconomics,affective neuroscience 
JEL:  D01 D87 D91 
Date:  2019 
URL:  http://d.repec.org/n?u=RePEc:zbw:ifwedp:201945&r=all 
By:  Thomas Delcey (CES  Centre d'économie de la Sorbonne  UP1  Université PanthéonSorbonne  CNRS  Centre National de la Recherche Scientifique); Francesco Sergi (UWE Bristol  University of the West of England [Bristol]) 
Abstract:  This article investigates the origins and early development of the association between the efficient market hypothesis and rational expectations. These two concepts are today distinctive theoretical benchmarks for mainstream approaches to, respectively, finance and macroeconomics. Moreover, scholars in each of these two fields tend to associate the two ideas as related equilibrium concepts; they also claim that the two have a common historical origin. Although some historical accounts have been provided about either the origins of rational expectations or of the efficient market hypothesis, very few historians have been investigating the history of the association between the two concepts (or, more generally, the history of the interactions between macroeconomics and finance). The contribution of this paper is precisely to fill this gap in the historical literature, while assessing and challenging selfproduced narratives told by practitioners. We suggest that the two concepts were independently developed in the 1960s. Then, we illustrate how they were associated for the first time the early 1970s, within a debate about the term structure of the interest rates involving Sargent, Modigliani, Shiller, and Fama. Finally, we discuss some early controversies about the association, which nevertheless became, at the turn of the 1970s, a stepstone for both macroeconomics and finance. 
Keywords:  Efficient market hypothesis,Fama (Eugene),Lucas (Robert E),history of finance,history of macroeconomics,rational expectations,Sargent (Thomas J) 
Date:  2019–07–17 
URL:  http://d.repec.org/n?u=RePEc:hal:cesptp:hal02187362&r=all 