nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2019‒09‒02
twelve papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence By Adrian Bruhin; Maha Manai; Luis Santos-Pinto
  2. Expected utility operators and coinsurance problem By Irina Georgescu
  3. Smoking and Intertemporal Risk Attitudes By Glenn W. Harrison; Andre Hofmeyr; Harold Kincaid; Don Ross; J. Todd Swarthout
  4. Financial Policies and Internal Governance with Heterogeneous Risk Preferences By Chen, Shiqi; Lambrecht, Bart
  5. Child Human Capital – The Importance of Parenting Style By Bolin, Kristian; Caputo, Michael R.
  6. Optimal Radio Access Network Selection in Multi-RAT HetNets Using Matching Game Approach By Anany, M. G.; El Din, Eman Serag; Elmesalawy, Mahmoud M.
  7. Outgroup Homogeneity Bias Causes Ingroup Favoritism By Marcel Montrey; Thomas R. Shultz
  8. Energy-Efficient Approach for Beamforming Design and BBUs Aggregation in Heterogeneous C-RAN By Abdelhakam, Mostafa M.; Elmesalawy, Mahmoud M.
  9. The role of heterogeneity of patients’ preferences in kidney transplantation By Mesfin G. Genie; Antonio Nicolò; Giacomo Pasini
  10. A Structural Model for the Coevolution of Networks and Behavior By Hsieh, Chih-Sheng; König, Michael; Liu, Xiaodong
  11. Market timing under public and private information By Jean Paul Rabanal; Aleksei Chernulich; John Horowitz; Olga A. Rud; Manizha Sharifova
  12. Non-Life-Threatening Ailments and Rational Patience By Bolin, Kristian; Caputo, Michael R.

  1. By: Adrian Bruhin; Maha Manai; Luis Santos-Pinto
    Abstract: The literature suggests that probability weighting and choice set dependence influence risky choices. However, their relative importance has not been tested jointly.We present a joint test that uses binary choices between lotteries provoking Common Consequence and Common Ratio Allais Paradoxes and manipulates their correlation structure. We show non-parametrically that probability weighting and choice set dependence both play a role at describing aggregate choices. To parsimoniously account for heterogeneity, we also estimate a structural model using a finite mixture approach.The model uncovers substantial heterogeneity and classifies subjects into three types: 38% Prospect Theory types whose choices are predominantly driven by probability weighting, 34% Salience Theory types whose choices are predominantly driven by choice set dependence, and 28% Expected Utility Theory types. The model predicts typespecific dierences in the frequency of preference reversals out-of-sample. Moreover, the out-of-sample predictions indicate that the choice context shapes the influence of choice set dependence.
    Keywords: Choice under Risk, Choice Set Dependence, Probability Weighting, Salience Theory, Prospect Theory, Preference Reversals
    JEL: D81 C91 C49
    Date: 2019–08
  2. By: Irina Georgescu
    Abstract: The expected utility operators introduced in a previous paper, offer a framework for a general risk aversion theory, in which risk is modelled by a fuzzy number $A$. In this paper we formulate a coinsurance problem in the possibilistic setting defined by an expected utility operator $T$. Some properties of the optimal saving $T$-coinsurance rate are proved and an approximate calculation formula of this is established with respect to the Arrow-Pratt index of the utility function of the policyholder, as well as the expected value and the variance of a fuzzy number $A$. Various formulas of the optimal $T$-coinsurance rate are deduced for a few expected utility operators in case of a triangular fuzzy number and of some HARA and CRRA-type utility functions.
    Date: 2019–08
  3. By: Glenn W. Harrison; Andre Hofmeyr; Harold Kincaid; Don Ross; J. Todd Swarthout
    Abstract: Atemporal risk preferences, time preferences, and intertemporal risk preferences are central to economic explanations of addiction, but have received little attention in the experimental economic literature on substance use. We conduct an incentive-compatible experiment designed to elicit the atemporal risk preferences, time preferences, and intertemporal risk preferences of a sample of student (n = 145) and staff (n = 111) smokers, ex-smokers, and non-smokers at the University of Cape Town in 2016-2017. We estimate a structural model of intertemporal risk preferences jointly with a rank-dependent utility model of choice under atemporal risk and a quasi-hyperbolic model of time preferences. We find no substantive differences in atemporal risk preferences according to smoking status, smoking intensity, and smoking severity, but do find that time preferences have an economically significant association with smoking behaviour. Smokers discount at a far higher rate than non-smokers, and ex-smokers discount at a level between these groups. There is also a large, positive relationship between smoking intensity and discounting behaviour that has important implications for treatment. The intertemporal risk preferences of our sample exhibit significant heterogeneity and we find, contrary to the assumption employed by some economic models, that smokers do not exhibit intertemporal risk seeking behaviour. Instead, our sample is characterised by high levels of intertemporal risk aversion which varies by smoking intensity and smoking severity in men, but not in women.
    Date: 2018–12
  4. By: Chen, Shiqi; Lambrecht, Bart
    Abstract: We consider a group of investors with heterogeneous risk preferences that determines a firm's investment policy, and each investor's compensation function. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (busts), reconciling the diversification of opinions hypothesis and the group shift hypothesis. The most (least) risk averse investor has a strictly concave (convex) claim on the firm's net worth. For intermediate risk preferences investors' claim is S-shaped, resembling preferred stock. We derive investors' utility weights absent wealth distribution and under social optimization.
    Keywords: governance; Group decisions; investment; Payout; Risk Preference
    Date: 2019–07
  5. By: Bolin, Kristian (Department of Economics, School of Business, Economics and Law, Göteborg University); Caputo, Michael R. (Department of Economics, University of Central Florida)
    Abstract: Investments in the human capital of children during their upbringing determine the opportunities available in adulthood. Recognizing that the parent-child interaction plays a significant role in the accumulation of child human capital, we develop a differential game in which the parent may invest directly in child human capital and the child consumes goods that influence the accumulation of their human capital. We compare the accumulation of child human capital between three different parenting styles, formalized as three different solution concepts to the differential game: (i) the parent and the child maximizes a joint utility function (cooperative solution), (ii) the parent announces a strategy dependent on time only (open-loop Stackelberg), (iii) the parent’s strategy depends on the accrued amount of human capital (feedback Stackelberg). We show that under rather general assumptions the open-loop Stackelberg equilibrium is time consistent, and coincides with a feedback Stackelberg equilibrium. Using cooperative parenting as a benchmark, we find that less or more child human capital may be accumulated over the family’s planning horizon under “open-loop Stackelberg” parenting, depending on parental and child preferences for human capital and wealth at the terminal time of the family’s planning horizon, and on the extent to which child consumption influences the accumulation of their human capital. In particular, if the child’s preference for terminal time wealth is strong enough, more human capital will be accumulated under “open-loop Stackelberg” parenting.
    Keywords: Differential Game Theory; Intertemporal Choice; Human Capital
    JEL: C73 J24
    Date: 2019–08
  6. By: Anany, M. G.; El Din, Eman Serag; Elmesalawy, Mahmoud M.
    Abstract: Due to the dramatic growth in mobile data traffic, Multiple Radio Access Technologies (Multi-RAT) heterogeneous Networks (HetNets) have been proposed as a promising solution to cope with the high traffic demand in mobile networks. In this work we propose a User Equipment (UE) radio access network selection algorithm in a Wireless Local Area Network (WLAN) and LTE Multi-RAT HetNet, where matching game approach is applied. In this algorithm, UEs propose to their best candidate based on a utility function that is formulated to maximize their achieved downlink data rate. Then base stations accept or reject the proposals based on their utility. The performance of the proposed approach is investigated and compared to other models, and simulation results proved its outperformance.
    Keywords: Multi-RAT,HetNet,network selection,matching game
    Date: 2019
  7. By: Marcel Montrey; Thomas R. Shultz
    Abstract: Ingroup favoritism, the tendency to favor ingroup over outgroup, is often explained as a product of intergroup conflict, or correlations between group tags and behavior. Such accounts assume that group membership is meaningful, whereas human data show that ingroup favoritism occurs even when it confers no advantage and groups are transparently arbitrary. Another possibility is that ingroup favoritism arises due to perceptual biases like outgroup homogeneity, the tendency for humans to have greater difficulty distinguishing outgroup members than ingroup ones. We present a prisoner's dilemma model, where individuals use Bayesian inference to learn how likely others are to cooperate, and then act rationally to maximize expected utility. We show that, when such individuals exhibit outgroup homogeneity bias, ingroup favoritism between arbitrary groups arises through direct reciprocity. However, this outcome may be mitigated by: (1) raising the benefits of cooperation, (2) increasing population diversity, and (3) imposing a more restrictive social structure.
    Date: 2019–08
  8. By: Abdelhakam, Mostafa M.; Elmesalawy, Mahmoud M.
    Abstract: Heterogeneous cloud radio access network (C-RAN) that combines the benefits of C-RAN and multi-tier heterogeneous networks (HetNets) is emerged as a novel network solution for improving both spectrum and energy efficiencies. In this work, we propose an energy-efficient approach that considers both RRHs beamforming design and BBUs aggregation in heterogeneous C-RAN. First, the problem is formulated as an optimization problem to maximize the weighted energy efficiency utility function subject to BBU processing capability, per-user quality-ofservice (QoS) requirement and per-RRH total transmit power constraints. Then, the optimization problem is decomposed into two sub problems. The first sub problem is a transmit beamforming vectors optimization problem. This problem is transformed to a weighted sum mean square error (MSE) minimization problem and solved using a weighted minimum mean square error (WMMSE) algorithm. The second sub problem is the BBUs aggregation problem. This problem is converted to a bin packing problem and we propose an algorithm based on the Best-Fit-Decreasing method to solve it. In order to show the effectiveness of the proposed energy-efficient approach, we compare it with different algorithms that are presented in the literature.
    Keywords: Heterogeneous cloud radio access network,beamforming,weighted minimum mean square error (WMMSE),BestFit-Decreasing
    Date: 2019
  9. By: Mesfin G. Genie (Department of Economics, University Of Venice Cà Foscari); Antonio Nicolò (Dipartamento di Scienze Economiche “Marco Fanno”, Università degli Studi di Padova; School of Social Sciences, The University of Manchester); Giacomo Pasini (Ca’ Foscari University of Venice; NETSPAR, Network for Studies on Pensions, Ageing and Retirement, Tilburg)
    Abstract: We elicit time and risk preferences for kidney transplantation from the entire population of patients of the largest Italian transplant centre using a discrete choice experiment (DCE). We measure patients’ willingness-to-wait (WTW), expressed in months, for receiving a kidney with one-year longer expected graft survival, or low risk of complication. Using a mixed logit in WTW-space model, we find heterogeneity in patients’ preferences. Our model allows WTW to vary with the patient’s age and duration of dialysis. The results suggest that WTW correlates with age and duration of dialysis. The implication for transplant practice is that including individual preferences in kidney allocation protocols that assign “non-ideal” (expanded donor criteria) organs may not only increase the expected survival rates of patients with transplanted organs but also improve patients’ satisfaction.
    Keywords: Stated preferences, Mixed logit, Willingness to wait, Marginal kidney
    JEL: I18 I14 C90 D61
    Date: 2019
  10. By: Hsieh, Chih-Sheng; König, Michael; Liu, Xiaodong
    Abstract: This paper introduces a structural model for the coevolution of networks and behavior. The microfoundation of our model is a network game where agents adjust actions and network links in a stochastic best-response dynamics with a utility function allowing for both strategic externalities and unobserved heterogeneity. We show the network game admits a potential function and the coevolution process converges to a unique stationary distribution characterized by a Gibbs measure. To bypass the evaluation of the intractable normalizing constant in the Gibbs measure, we adopt the Double Metropolis-Hastings algorithm to sample from the posterior distribution of the structural parameters. To illustrate the empirical relevance of our structural model, we apply it to study R&D investment and collaboration decisions in the chemicals and pharmaceutical industry and find a positive knowledge spillover effect. Finally, our structural model provides a tractable framework for a long-run key player analysis.
    Keywords: Double Metropolis-Hastings algorithm; Key players; network interactions; R&D collaboration networks; stochastic best-response dynamics; strategic network formation; Unobserved heterogeneity
    JEL: C11 C31 C63 C73 L22
    Date: 2019–08
  11. By: Jean Paul Rabanal (Monash University); Aleksei Chernulich (NYU Abu Dhabi); John Horowitz (Ball State University); Olga A. Rud (RMIT University); Manizha Sharifova (University of the Pacific)
    Abstract: We design an experiment where subjects must choose between a risky investment, which evolves according to an autoregressive process, and a risk-free investment which has a constant payoff. The treatments vary the information available on the risky investment when players choose the risk-free alternative. We find that in the public information treatment, which captures the information structure of index funds, subjects stay out of the market longer compared to the private information environment, which captures elements of private equity investment. The difference in behavior across treatments can be explained by the demand for information, which appears to overcome risk aversion.
    Keywords: Forecasting experiment, investment decisions, market timing, discrete choice
    JEL: D81 D83 D84 G11 G17 C91
    Date: 2019–08
  12. By: Bolin, Kristian (Department of Economics, School of Business, Economics and Law, Göteborg University); Caputo, Michael R. (Department of Economics, University of Central Florida)
    Abstract: The time at which a rational patient might choose an elective medical procedure for a non-life-threatening ailment is contemplated. The resulting model is purposely uncomplicated but general, and accounts for several basic factors that might affect such a decision. One such factor is that a patient cannot know with certainty the degree to which the medical procedure will be successful. Even so, patients have information about the expected outcome of the procedure and its risk, and about how the expected outcome and risk are affected by medical technological progress and surgeon experience. The effect of changes in exogenous variables on the timing of the medical procedure and on patient welfare are investigated. It is shown that risk averse and prudent patients behave in an unambiguous manner in response to changes in all of the exogenous variables.
    Keywords: Health Behavior; Optimal Timing; Medical Decisions
    JEL: I12
    Date: 2019–08

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