
on Utility Models and Prospect Theory 
Issue of 2019‒09‒02
twelve papers chosen by 
By:  Adrian Bruhin; Maha Manai; Luis SantosPinto 
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 nonparametrically 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 outofsample. Moreover, the outofsample 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 
URL:  http://d.repec.org/n?u=RePEc:lau:crdeep:19.05&r=all 
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 ArrowPratt 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 CRRAtype utility functions. 
Date:  2019–08 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1908.06927&r=all 
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 incentivecompatible 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, exsmokers, and nonsmokers at the University of Cape Town in 20162017. We estimate a structural model of intertemporal risk preferences jointly with a rankdependent utility model of choice under atemporal risk and a quasihyperbolic 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 nonsmokers, and exsmokers 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 
URL:  http://d.repec.org/n?u=RePEc:exc:wpaper:201809&r=all 
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 timevarying 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 Sshaped, 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 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:13888&r=all 
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 parentchild 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 (openloop Stackelberg), (iii) the parent’s strategy depends on the accrued amount of human capital (feedback Stackelberg). We show that under rather general assumptions the openloop 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 “openloop 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 “openloop Stackelberg” parenting. 
Keywords:  Differential Game Theory; Intertemporal Choice; Human Capital 
JEL:  C73 J24 
Date:  2019–08 
URL:  http://d.repec.org/n?u=RePEc:hhs:gunwpe:0771&r=all 
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 (MultiRAT) 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 MultiRAT 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:  MultiRAT,HetNet,network selection,matching game 
Date:  2019 
URL:  http://d.repec.org/n?u=RePEc:zbw:itsm19:201748&r=all 
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 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1908.08203&r=all 
By:  Abdelhakam, Mostafa M.; Elmesalawy, Mahmoud M. 
Abstract:  Heterogeneous cloud radio access network (CRAN) that combines the benefits of CRAN and multitier heterogeneous networks (HetNets) is emerged as a novel network solution for improving both spectrum and energy efficiencies. In this work, we propose an energyefficient approach that considers both RRHs beamforming design and BBUs aggregation in heterogeneous CRAN. First, the problem is formulated as an optimization problem to maximize the weighted energy efficiency utility function subject to BBU processing capability, peruser qualityofservice (QoS) requirement and perRRH 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 BestFitDecreasing method to solve it. In order to show the effectiveness of the proposed energyefficient 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),BestFitDecreasing 
Date:  2019 
URL:  http://d.repec.org/n?u=RePEc:zbw:itsm19:201740&r=all 
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’ willingnesstowait (WTW), expressed in months, for receiving a kidney with oneyear longer expected graft survival, or low risk of complication. Using a mixed logit in WTWspace 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 “nonideal” (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 
URL:  http://d.repec.org/n?u=RePEc:ven:wpaper:2019:25&r=all 
By:  Hsieh, ChihSheng; 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 bestresponse 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 MetropolisHastings 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 longrun key player analysis. 
Keywords:  Double MetropolisHastings algorithm; Key players; network interactions; R&D collaboration networks; stochastic bestresponse dynamics; strategic network formation; Unobserved heterogeneity 
JEL:  C11 C31 C63 C73 L22 
Date:  2019–08 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:13911&r=all 
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 riskfree investment which has a constant payoff. The treatments vary the information available on the risky investment when players choose the riskfree 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 
URL:  http://d.repec.org/n?u=RePEc:apc:wpaper:151&r=all 
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 nonlifethreatening 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 
URL:  http://d.repec.org/n?u=RePEc:hhs:gunwpe:0772&r=all 