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on Utility Models and Prospect Theory |
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Issue of 2019‒08‒19
23 papers chosen by |
| By: | Frick, Mira (Yale University); Iijima, Ryota (Yale University); Le Yaouanq, Yves (LMU Munich) |
| Abstract: | We propose a class of multiple-prior representations of preferences under ambiguity where the belief the decision-maker (DM) uses to evaluate an uncertain prospect is the outcome of a game played by two conflicting forces, Pessimism and Optimism. The model does not restrict the sign of the DM\'s ambiguity attitude, and we show that it provides a unified framework through which to characterize different degrees of ambiguity aversion, as well as to represent context-dependent negative and positive ambiguity attitudes documented in experiments. We prove that our baseline representation, Boolean expected utility (BEU), yields a novel representation of the class of invariant biseparable preferences (Ghirardato, Maccheroni and Marinacci, 2004), which drops uncertainty aversion from maxmin expected utility (Gilboa and Schmeidler, 1989), while extensions of BEU allow for more general departures from independence. |
| Keywords: | multiple priors; ambiguity; dual-self models; |
| JEL: | D81 |
| Date: | 2019–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:173&r=all |
| By: | Jason Delaney (Georgia Gwinnett College); Sarah Jacobson (Williams College); Thorsten Moenig (Temple University) |
| Abstract: | Is the assumption that people automatically know their own preferences innocuous? We present a theory and an experiment that study the limits of preference discovery. If tastes must be learned through experience, preferences for some goods may never be learned because it is costly to try new things, and thus non-learned preferences may cause wel- fare loss. We conduct an online experiment in which finite-lived par- ticipants have an induced utility function over fictitious goods about whose marginal utilities they have initial guesses. Subjects learn most, but not all, of their preferences eventually. Choice reversals occur, but primarily in early rounds. Subjects slow their sampling of new goods over time, supporting our conjecture that incomplete learning can persist. Incomplete learning is more common for goods that are rare, have low initial value guesses, or appear in choice sets alongside goods that appear attractive. It is also more common for people with lower incomes or shorter lifetimes. More noise in initial value guesses has opposite effects for low-value and high-value goods because it affects the perceived likelihood that the good is worth trying. Over time, sub- jects develop a pessimistic bias in beliefs about goods’ values, since optimistic errors are more likely to be corrected. Overall, our results show that if people need to learn their preferences through consump- tion experience, that learning process will cause choice reversals, and even when a person has completed sampling the goods she is willing to try, she may continue to lose welfare because of suboptimal choices that arise from non-learned preferences. |
| Keywords: | discovered preferences, preference stability, learning |
| JEL: | D81 D83 D01 D03 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2019-08&r=all |
| By: | Jetlir Duraj; Kevin He |
| Abstract: | A benevolent sender communicates non-instrumental information over time to a Bayesian receiver who experiences gain-loss utility over changes in beliefs ("news utility"). We show how to inductively compute the optimal dynamic information structure for arbitrary news-utility functions. With diminishing sensitivity over the magnitude of news, contrary to piecewise-linear news-utility models, one-shot resolution of uncertainty is strictly suboptimal under commonly used functional forms. We identify additional conditions that imply the sender optimally releases good news in small pieces but bad news in one clump. By contrast, information structures featuring the opposite skewness - i.e., delivering bad news gradually - are never optimal. A sender lacking commitment power can only credibly convey partial good news when the receiver is sufficiently loss averse. With diminishing sensitivity but no loss aversion, the babbling equilibrium is essentially unique. Contrary to the commitment case, a sender without commitment may generate higher equilibrium news-utility for receivers with higher loss aversion. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1908.00084&r=all |
| By: | Antonio, Filippin; Marco, Mantovani |
| Abstract: | The paper investigates the relation between the risk preferences of traders and the information-aggregation properties of an experimental call market. We find evidence inconsistent with the prediction that market-clearing prices are closer to full revelation of the state when traders are more risk-averse. The observed pattern of prices is close to the risk-neutral benchmark, while individuals are risk averse both in a risk elicitation task and when estimating their risk aversion from their market activity. This purported conflict is explained by an attitude to exploit only part of the information possessed that we label operational conservatism. We show that operational conservatism represents an additional, although suboptimal, way to express one’s risk aversion. A remarkably consistent picture of measured risk preferences emerges then in our data. Independently-elicited risk attitudes retain the footprint of both the standard and the suboptimal facet of risk aversion estimated from subjects’ market activity. |
| JEL: | C81 C91 D81 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:404&r=all |
| By: | Ahmad, Naimzada; Marina, Pireddu |
| Abstract: | We propose a discrete-time exchange economy evolutionary model, in which two groups of agents are possibly characterized by heterogeneous preference structures. With respect to the classical Walrasian framework, in our setting the definition of equilibrium, in addition to utility functions and endowments, depends also on population shares, which affect the market clearing conditions. We prove that, despite such difference with the standard framework, for every economy and for each population shares there exists at least one equilibrium and we show that, for all population shares, generically in the set of the economies, equilibria are finite and regular. We then introduce the dynamic law governing the evolution of the population shares, and we investigate the existence and the stability of the resulting stationary equilibria. More precisely, we assume that the reproduction level of a group is related to its attractiveness degree, which depends on the social visibility level, determined by the consumption choices of the agents in that group. The attractiveness of a group is described via a generic bell-shaped map, increasing for low visibility levels, but decreasing when the visibility of the group exceeds a given threshold value, due to a congestion effect. Thanks to the combined action of the price mechanism and of the share updating rule, the model may reproduce the recurrent dynamic behavior typical of the fashion cycle, presenting booms and busts in the agents’ consumption choices, and in the groups’ attractiveness and population shares. We illustrate the emergence of fashion cycle dynamics in the case of Stone-Geary utility functions, which generalize the Cobb-Douglas utility functions, and for different formulations of the attractiveness maps, already considered in the literature. |
| Keywords: | general equilibrium; heterogeneous agents; evolution; bifurcation; fashion cycle. |
| JEL: | C62 D11 D51 D91 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:401&r=all |
| By: | Ludmila Matysková; Brian Rogers; Jakub Steiner; Keh-Kuan Sun |
| 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 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: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_113&r=all |
| By: | Ronald Stauber |
| Abstract: | The term “belief function” is generally used to refer to a class of capacities that can be viewed as representing ambiguity averse preferences. This paper introduces a definition of equilibrium for normal-form games with ambiguous beliefs, where belief functions are used to describe strategic uncertainty. To capture independence of strategies and beliefs, a novel notion of a “strategic product integral” is introduced for belief functions, based on the Möbius transform of a capacity, and shown to be different from the Choquet integral of an appropriate product capacity. A characterization of the integral in terms of maxmin expected utility expressed relative to elements of the cores of the respective belief functions, is also presented. The resulting equilibrium notion relies on the Möbius transform to embed objectively chosen probabilistic mixed strategies into ambiguous beliefs of opponents about these strategies, while incorporating stronger consistency requirements than those imposed by previous definitions of equilibria under ambiguity. Classification-C72, D81 |
| Keywords: | Belief functions; Product capacities; Equilibrium under ambiguity; Strategic uncertainty |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2019-668&r=all |
| By: | Kaelab K. Haile; Eleonora Nillesen; Nyasha Tirivayi |
| Abstract: | This study examines the effect of smallholder farmers’ access to a formal climate risk transfer mechanism on their risk preferences. Survey and experimental data were collected from smallholder farmers that have access to weather index-based crop insurance (WICI) in Ethiopia. We use an endogenous switching (ESP) model to address self-selection and simultaneity bias. Results from the ESP model show that farmers who purchased WICI are less likely to be risk-averse compared with non-purchaser farmers. Similarly, non-purchasers would have attained a significant reduction in their risk-aversion if they had taken up the insurance product. We also find that WICI has a positive and statistically significant effect on farmers’ real-life risk-taking behavior as exemplified by mineral fertilizer use. The implication of our findings is that formal climate risk transfer mechanisms can positively influence households’ economic decisions and outcomes, through reducing risk aversion. Therefore, they can possibly contribute to poverty alleviation and economic development within agrarian economies that are exposed to recurrent and severe climate shocks. |
| Keywords: | weather index-based crop insurance, endogenous preferences, experimental risk elicitation, endogenous switching probit, sub-Saharan, Ethiopia |
| JEL: | C91 D03 I38 N27 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7717&r=all |
| By: | Jeffrey E. Harris (Department of Economics, Massachusetts Institute of Technology); Mariana Gerstenblüth (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Patricia Triunfo (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República) |
| Abstract: | We asked 97 cigarette smokers to make a series of 12 binary choices between experimental cigarette packages with varying warnings and background colors. Each smoker had to decide which of the two packages contained cigarettes less risky for his health. We tested whether the smokers, confronted with warnings that were repugnant and threatening to many of them, could still make choices that adhered to the standard axioms of rational choice. We supplemented our observations on smokers’ choices with data on their eye movements. We find that participants universally made choices consistent with a complete, transitive preference ordering. We find little evidence of inconsistent choices violating the weak axiom of revealed preference. In a majority of smokers, we find strong evidence of the use of a lexicographic decision rule to assess the riskiness of a cigarette package. These smokers first ranked the two packages solely on the basis of their warnings. Only when the two packages had the same warning did they rankthe packages on the basis of their color. The data on eye tracking strongly confirmed the lexicographic nature of the underlying decision rule. Our studyrepresentsan entirely different angle of inquiry into thequestion of rational addiction. |
| Keywords: | addiction, cigarettes, smoking, health warnings, rationality, discrete choice experiment, eye tracking, transitivity, additive utility, lexicographic preferences, context-dependent preferences, response time, drift diffusion model, Schelling-Thaler-Shefrin dual-self model |
| JEL: | D12 D83 D87 D91 I12 M31 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:ude:wpaper:0218&r=all |
| By: | Dietz, Simon; Venmans, Frank |
| Abstract: | There is a considerable body of evidence showing that our preferences exhibit both reference dependence and loss aversion, a.k.a. the endowment effect. In this paper, we consider the implications of the endowment effect for discounting, with a special focus on discounting future improvements in the environment. We show that the endowment effect modifies the discount rate via (i) an instantaneous endowment effect and (ii) a reference-updating effect. Moreover we show that these two effects often combine to dampen the preference to smooth consumption over time. What this implies for discounting future environmental benefits may then depend critically on whether environmental quality is merely a factor of production of material consumption, or whether it is an amenity. On an increasing path of material consumption, dampened consumption smoothing implies a lower discount rate. But on a declining path of environmental quality and where we derive utility directly from environmental quality, it implies a higher discount rate. On non-monotonic paths, loss aversion specifically can give rise to substantial discontinuities in the discount rate. |
| Keywords: | discounting; endowment effect; environmental discount rate; loss aversion; reference dependence; relative prices; ES/K006576/1 |
| JEL: | D00 D61 H43 Q51 |
| Date: | 2019–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100110&r=all |
| By: | Philippe Jehiel (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - 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 - University College of London [London]); Juni Singh (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - 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) |
| Keywords: | Ambiguity,Bounded Rationality,Experiment,Learning,Coarse feedback,Valuation equilibrium |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-02183444&r=all |
| By: | Claudia Cerrone (Max Planck Institute for Research on Collective Goods, Bonn); Francesco Feri (Royal Holloway, Department of Economics); Philip R. Neary (Royal Holloway, Department of Economics) |
| Abstract: | Existing models of regret aversion assume that individuals can make an ex-post comparison between their choice and a foregone alternative. Yet in many situations such a comparison can be made only if someone else chose the alternative option. We develop a model where regret-averse agents must decide between the status quo and a new risky option that outperforms the status quo in expectation, and learn the outcome of the risky option, if unchosen, with a probability that depends on the choices of others. This turns what was previously a series of single-person decision problems into a coordination game. Most notably, regret can facilitate coordination on the status quo { an action that would not be observed if the agents were acting in isolation or had standard preferences. We experimentally test the model and find that regret-averse agents behave as predicted by our theory. |
| Keywords: | regret aversion, coordination games, information |
| JEL: | C72 C92 D81 D91 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2019_10&r=all |
| By: | Irina Georgescu; Jani Kinnunen |
| Abstract: | In the paper there is studied an optimal saving model in which the interest-rate risk for saving is a fuzzy number. The total utility of consumption is defined by using a concept of possibilistic expected utility. A notion of possibilistic precautionary saving is introduced as a measure of the variation of optimal saving level when moving from a sure saving model to a possibilistic risk model. A first result establishes a necessary and sufficient condition that the presence of a possibilistic interest-rate risk generates an extra-saving. This result can be seen as a possibilistic version of a Rothschilld and Stiglitz theorem on a probabilistic model of saving. A second result of the paper studies the variation of the optimal saving level when moving from a probabilistic model (the interest-rate risk is a random variable) to a possibilistic model (the interest-rate risk is a fuzzy number). |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1908.00445&r=all |
| By: | Coletta, Attilio; Giampietri, Elisa; Santeramo, Fabio Gaetano; Severini, Simone; Trestini, Samuele |
| Abstract: | The exposure of farmers to different (and increasing) risks has been recognized by the EU policy, which supports several risk management tools through the Common Agricultural Policy (CAP). Despite the vulnerability of the agricultural sector, and the attention paid at the EU level, the uptake of such tools is generally low across EU countries. The Italian case is emblematic: the uptake of subsidized crop insurance contracts is low, limited to few products, and concentrated in few areas. Coherently, the interest of policy makers toward explaining these characteristics and in gaining insights on the interventions that may help promoting participation is intense. This contribution investigates behavioral aspects linked to choices under risk and ambiguity, and account for time preferences in order to mimic the scenario faced by the potential adopters of the subsidized crop insurance contracts in Italy. Data are collected through questionnaires submitted to students from agricultural colleges in three administrative regions located in northern, central and southern Italy. Results show that attitude toward risk, ambiguity, and impatience are correlated with the intrinsic characteristics of respondents. In addition, some of those attitudes may help explaining decisions under uncertainty. Despite the empirical analysis is preliminary and focused on students, it allowed to validate a promising methodological approach capable of explaining farmer’s willingness to adopt (or renew) insurance contracts. By accounting for (currently under-investigated) behavioral aspects, it is likely to prove useful to re-design or implementing, more effectively, the current policies. |
| Keywords: | Insurance; subjective probabilities; risk preferences; choice experiment |
| JEL: | D81 D83 Q12 Q18 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95347&r=all |
| By: | Leonidas Enrique de la Rosa (Department of Economics and Business Economics, Aarhus University); Nikolaj Kirkeby Niebuhr (Department of Economics and Business Economics, Aarhus University) |
| Abstract: | Prior literature suggests that the zero-earnings discontinuity is caused by earnings management. This makes sense if investors are naïve. We test for the possibility of investor naïveté and find that they are aware of firms performing earnings management around zero reported earnings and that there is no ob-vious gain of reaching zero reported earnings. We extend a signaling model to include loss-averse investors and we find that earnings management is not only rational, but in equilibrium, it is not possible for investors to deduce the correct value of firms’ earnings around the discontinuity. Assuming our model gen-erates the observed data, a loss-aversion coefficient of 1.2595 matches the discontinuity below zero reported earnings observed in the data simulated from the model and in the actual data. This loss-aversion coefficient is consistent with Tversky and Kahneman (1992), who find that losses are weighted roughly twice as heavily as gains. |
| Keywords: | Discontinuity, Loss Aversion, Reporting, Signaling |
| JEL: | C70 D91 M41 |
| Date: | 2019–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2019-09&r=all |
| By: | Hardardottir, Hjördis (Department of Economics, Lund University) |
| Abstract: | In this paper, we study how increasing the cognitive demands of multitasking affects time preferences. The novelty of this paper is that it studied how time perception mediates the effect of multitasking on time preferences. Results from experimental psychology have demonstrated that people tend to experience the passage of time as quicker when they are busy with cognitively-demanding tasks. If time is experienced as passing faster, the future should be experienced as being closer, and patience should increase. However, a standard prediction from behavioral economics is that being cognitively loaded leads to less patient decisions. Our hypothesis is that increases in patience, driven by the speeding up of time, and decreases in patience, driven by decreased cognitive capacity, added together explain the total effect of increasing the cognitive demands of multitasking on time preferences. We also shed light on whether the observed relationship between time preferences and time perception within subjects is mirrored when comparing between subjects. |
| Keywords: | Time preferences; Multitasking; Cognitive load; Time perception; Foundations of preferences |
| JEL: | C91 D91 |
| Date: | 2019–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2019_011&r=all |
| By: | Mogens Fosgerau (DTU - Technical University of Denmark [Lyngby]); Julien Monardo (ENS Cachan - École normale supérieure - Cachan, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); André de Palma (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique) |
| Abstract: | This paper proposes an empirical model of inverse demand for differentiated products: the Inverse Product Differentiation Logit (IPDL) model. The IPDL model generalizes the commonly used nested logit model to allow richer substitution patterns, including complementarity. Nevertheless, the IDPL model can be estimated by two-stage least squares using aggregate data. We apply the IDPL model to data on ready-to-eat cereals in Chicago in 1991-1992, and find that complementarity is pervasive in this market. We then show that the IPDL model belongs to a wider class of inverse demand models in which products can be complements, and which is sufficiently large to encompass a large class of discrete choice demand models. We establish invertibility for this wider class, thus extending previous results on demand inversion. |
| Keywords: | Demand estimation,Demand invertibility,Differentiated products,Discrete choice,Nested logit,Random utility,Representative consumer |
| Date: | 2019–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02183411&r=all |
| By: | Leif Danziger; Eliakim Katz |
| Abstract: | Courts typically base compensation for loss of income in personal injury cases on either mean or median work income. Yet, quantatively, mean and median incomes are typically very different. For example, in the US median income is 65 percent of mean income. In this paper we use economic theory to determine the relation between the appropriate make-whole (full) compensation and mean and median work incomes. Given that consumption uncertainty associated with compensation generally exceeds that associated with work income, we show that the appropriate make-whole compensation exceeds mean (and therefore median) work income. Hence, if the compensation must be either the mean or the median work income, then mean work income should be selected. |
| Keywords: | compensation, personal injury, income loss, uncertainty, risk aversion |
| JEL: | K13 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7748&r=all |
| By: | Stark, Oded (University of Bonn); Szczygielski, Krzysztof (University of Warsaw) |
| Abstract: | We link causally the riskiness of men's management of their finances with the probability of their experiencing a divorce. Our point of departure is that when comparing single men to married men, the former manage their finances in a more aggressive (that is, riskier) manner. Assuming that single men believe that low relative wealth has a negative effect on their standing in the marriage market and that they care about their standing in that market more than married men do, we find that a stronger distaste for low relative wealth translates into reduced relative risk aversion and, consequently, into riskier financial behavior. With this relationship in place we show how this difference varies depending on the "background" likelihood of divorce and, hence, on the likelihood of re-entry into the marriage market: married men in environments that are more prone to divorce exhibit risk-taking behavior that is more similar to that of single men than married men in environments that are little prone to divorce. We offer a theoretical contribution that helps inform and interpret empirical observations and regularities and can serve as a guide for follow-up empirical work, having established and identified the direction of causality. |
| Keywords: | men's preferences towards risk, risk-taking behavior, concern at having low relative wealth, relative and absolute risk aversion, marital-based difference in attitudes towards risk, likelihood of divorce |
| JEL: | D21 D81 G32 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12518&r=all |
| By: | Lee, Jiwon; Schulz, Lee; Tonsor, Glynn T. |
| Keywords: | Agricultural and Food Policy |
| Date: | 2019–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea19:290908&r=all |
| By: | Korff, Alex; Steffen, Nico |
| Abstract: | Utilizing the new Global Preference Survey (GPS) by Falk et al. (2018) and its data of unique scope on national preference structures in patience, risk attitude, reciprocity, trust and altruism, we are the first to explore a potential in uence on international trade outcomes of this broad set of economic and social preferences in a unified setting. Adding to the evidence on preferences' importance for aggregate outcomes, we find distinct relationships between national preference leanings and marked differences in trade ows and relationships, both on the country-level and between bilateral partners. Our main results suggest that countries differing in their willingness to behave negatively reciprocal tend to trade significantly less amongst each other, while countries that are patient or risk-averse tend to shift towards exporting more differentiated goods as opposed to homogeneous goods and vice versa. |
| Keywords: | Trade determinants,Non-Tari Barriers,Economic preferences,Sociocultural variation |
| JEL: | F10 F14 D01 D91 Z10 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:321&r=all |
| By: | Jonathan Benchimol; Lahcen Bounader |
| Abstract: | The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses. |
| Date: | 2019–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/166&r=all |
| By: | Dolan, Paul (London School of Economics); Lordan, Grace (London School of Economics) |
| Abstract: | We examine how intergenerational mobility affects subjective wellbeing (SWB) using data from the British Cohort Study. Our SWB measures encapsulates both life satisfaction and mental health, and we consider both relative and absolute movements in income. We find that relative income mobility is a significant predictor of life satisfaction and mental health, whether people move upward or downward. For absolute income, mobility is only a consistent predictor of SWB and mental health outcomes if the person moves downwards, and in this case the impact is far larger than relative mobility. For both relative and income mobility downward movements affect SWB to a greater extent than upward movements, consistent with notions of loss aversion. Notably, we find that social class mobility does not affect SWB. We present evidence that the significant relative and absolute mobility effects we find operate partially through financial perceptions and consumption changes which can occur because of income mobility. |
| Keywords: | income mobility, relative income, social class mobility, loss aversion, intergenerational mobility, life satisfaction, SWB, subjective wellbeing, mental health |
| JEL: | D31 D63 I1 J60 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12519&r=all |