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on Utility Models and Prospect Theory |
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Issue of 2019‒11‒11
twelve papers chosen by |
| By: | Federico Echenique; Taisuke Imai; Kota Saito |
| Abstract: | We design and implement a novel experimental test of subjective expected utility theory and its generalizations. Our experiments are implemented in the laboratory with a student population, and pushed out through a large-scale panel to a general sample of the US population. We find that a majority of subjects' choices are consistent with maximization of {\em some} utility function, but not with subjective utility theory. The theory is tested by gauging how subjects respond to price changes. A majority of subjects respond to price changes in the direction predicted by the theory, but not to a degree that makes them fully consistent with subjective expected utility. Surprisingly, maxmin expected utility adds no explanatory power to subjective expected utility. Our findings remain the same regardless of whether we look at laboratory data or the panel survey, even though the two subject populations are very different. The degree of violations of subjective expected utility theory is not affected by age nor cognitive ability, but it is correlated with financial literacy. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1911.00946&r=all |
| By: | Lorenzo Bastianello; Jos\'e Heleno Faro |
| Abstract: | We study intertemporal decision making under uncertainty. We give the first full characterization of discounted expected utility in a framework \`a la Savage. Despite the popularity of this model, no characterization is available in the literature. The concept of stationarity, introduced by Koopmans for deterministic discounted utility, plays a central role for both attitudes towards time and towards uncertainty. We show that a strong stationarity axiom characterizes discounted expected utility. When hedging considerations are taken into account, a weaker stationarity axiom generalizes discounted expected utility to Choquet discounted expected utility, allowing for non-neutral attitudes towards uncertainty. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1911.00370&r=all |
| By: | Abhinash Borah (Department of Economics, Ashoka University); Christopher Kops (Heidelberg University) |
| Abstract: | We address the oft-repeated criticism that the demands which the rational choice approach makes on the knowledge and cognition of a decision maker (DM) are way beyond the capabilities of typical human intelligence. Our key ï¬ nding is that it may be possible to arrive at this ideal of rationality by means of cognitively less demanding, heuristic-based ecological reasoning that draws on information about others’ choices in the DM’s environment. Formally, we propose a choice procedure under which, in any choice problem, the DM, ï¬ rst, uses this information to shortlist a set of alternatives. The DM does this shortlisting by a mental process of categorization whereby she draws similarities with certain societal members—the ingroup—and distinctions from others—the outgroup—and considers those alternatives that are similar (dissimilar) to ingroup (outgroup) members’ choices. Then, she chooses from this shortlisted set by applying her preferences, which may be incomplete owing to limitations of knowledge. We show that if a certain homophily condition connecting the DM’s preferences with her ingroup-outgroup categorization holds, then the procedure never leads the DM to making bad choices. If, in addition, a certain shortlisting consistency condition holds vis-a-vis non-comparable alternatives under the DM’s preferences, then the procedure results in rational choices. |
| Keywords: | Rational choice, ecological rationality, ingroup-outgroup categorization, fast and frugal heuristics, homophily |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ash:wpaper:07&r=all |
| By: | Matthew Ryan (School of Economics, Auckland University of Technology) |
| Abstract: | The Condorcet Jury Theorem formalises the “wisdom of crowds”: binary decisions made by majority vote are asymptotically correct as the number of voters tends to infinity. This classical result assumes like-minded, expected utility maximising voters who all share a common prior belief about the right decision. Ellis (2016) shows that when voters have ambiguous prior beliefs – a (closed, convex) set of priors – and follow maxmin expected utility (MEU), such wisdom requires that voters’ beliefs satisfy a “disjoin posteriors” condition: difference private signals lead to posterior sets with disjoint interiors. Both the original theorem and Ellis’s generalisation assume symmetric penalties for wrong decisions. If, as in the jury context, errors attract asymmetric penalties, then it is natural to consider voting rules that raise the hurdle for the decision carrying the heavier penalty for error (such as conviction in jury trials). In a classical model, Feddersen and Pesendorfer (1998) have shown that, paradoxically, raising this hurdle may actually increase the likelihood of the more serious error. In particular, crowds are not wise under the unanimity rule: the probability of the more serious error does not vanish as the crowd size tends to infinity. We show that this “Jury Paradox” persists in the presence of ambiguity, whether or not juror beliefs satisfy Ellis’s “disjoint posteriors” condition. We also characterise the strictly mixed equilibria of this model and study their properties. Such equilibria cannot exist in the absence of ambiguity but may exist for arbitrarily large jury size when ambiguity is present. In addition to “uninformative” strictly mixed equilibria, analogous to those exhibited by Ellis (2016), there may also exist strictly mixed equilibria which are “informative” about voter signals. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:aut:wpaper:201907&r=all |
| By: | Massimo Guidolin; Manuela Pedio; Milena Petrova |
| Abstract: | We study the recursive, out-of-sample realized predictive performance of a rich set of predictor choices and models, spanning linear and Markov switching frameworks when the forecast target is represented by excess NCREIF and equity NAREIT returns. We find considerable pockets of predictive power, especially at the short- and intermediate horizons and for private real estate returns, both in absolute term and in comparison to a simple, but powerful, historical sample mean benchmark. We then test whether such forecasting accuracy may translate to positive, risk-adjusted out-of-sample performance in a recursive mean-variance portfolio allocation exercise, selecting weights of stocks, bonds, cash, and real estate (private or public). Consistently, we find that especially in the case of private real estate, significant improvements in realized Sharpe ratios and mean-variance utility scores are achieved from a range of strategies, exploiting predictability at intermediate horizons, especially when supported by Markov switching models. These results are robust the inclusion of transaction costs and extend to public real estate. |
| Keywords: | Public real estate, REITs, private real estate, predictability, mean-variance portfolios. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp19122&r=all |
| By: | Philippe CHONÉ (Centre for Research in Economics and Statistics (CREST).); Lionel WILNER (INSEE-CREST.) |
| Abstract: | To assess strategic interactions in industries where endogenous product characteristics are unobserved to the researcher, we propose an empirical method that brings a competition-in-utility-space framework to the data. We apply the method to the French hospital industry. The utilities offered to patients are inferred from local market shares under AKM exclusion restrictions. The hospitals' objective functions are identified thanks to the gradual introduction of stronger financial incentives over the period of study. Offering more utility to each patient entails incurring higher costs per patient, implying that utilities are mostly strategic complements. Counterfactual simulations show that stronger incentives affect market shares but have little impact on the total number of patient admissions. We quantify the resulting gains for patients and losses for hospitals. |
| Keywords: | Competition in utility space; financial incentives; payment reform; hospital choice. |
| JEL: | D22 I11 L13 |
| Date: | 2019–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2019-21&r=all |
| By: | Adam Ayaita; Kathleen Stürmer |
| Abstract: | Risk aversion might affect current and potential teachers’ reaction to reforms, in particular payment reforms. However, evidence on teachers’ risk aversion in comparison to other occupations is limited. The present study is based on twelve waves of a representative German data set (N = 18,381) and shows that teaching relates positively to risk aversion, especially to risk aversion with respect to occupational career. Teachers score higher in risk aversion even than other civil servants. Risk-averse individuals are attracted to teaching from career outset; moreover, our results suggest an additional socialization effect during the employment that may reinforce this relationship. |
| Keywords: | Teachers; teaching; motives; risk aversion |
| JEL: | H75 I28 J20 J45 M50 O30 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp1057&r=all |
| By: | Nathalie GAUSSIER; Seghir ZERGUINI |
| Abstract: | This article is part of the STRATEGIE research project co-financed by the Région Nouvelle Aquitaine. It presents the MUST-B model (Integrated Modeling of Land-Use – Transport: for application in the Bordeaux agglomeration) which is based on systemic land-use / transport modeling with regards to how the land and property markets operate, and the interdependent factors for selecting the locations of households and employment. MUST-B is an agent-oriented model which simulates household and job location choices. It is based on an auction mechanism which models competition between agents in the real estate market (existing property holdings, including residential, industrial and tertiary) and in the land property market (from buildable land reserves) over a given timeframe. This auction procedure is based on maximizing the utility provided to the agent by a given location: housing for a household and an area for business activity for employment premises. Utility is a function of several characteristics relating to the space and premises occupied, such as accessibility, surface area, energy quality of the building, notoriety, agglomeration effects and taxes, or property prices, the latter being endogenous. In this article, the mechanisms and functioning of the land property and real estate markets which prevail in MUST-B are presented. Methodological choices and behavioral guidelines for agents (households/workplaces), are also set out, and to illustrate the operational nature of the model, the databases required for implementing the MUST-B in the Bordeaux Urban Area are presented. |
| Keywords: | LUTI, Choice of location, Households, Employment, Accessibility, Real estate prices, Multi-agent, Systemic modeling. |
| JEL: | R14 R31 R41 R52 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2019-13&r=all |
| By: | Kilkki, Kalevi; Hämmäinen, Heikki |
| Abstract: | There is a long tradition of studies using the concept of the value of time (VoT) to assess human behavior in diverse situations. The underlying assumption in most of the studies is that when different activities are available, a rational person selects the activity that provides the highest value or utility for her. However, two major restrictions affect the selection: time and money. Thus, the selection process needs to take into account the average value created over a period of time and the (possible) money spent during the activity. In practice, this selection process is complicated and arduous to model accurately. There is an obvious need in many fields to predict how people behave, how they appreciate different situations, and how they allocate their time, which has led to extensive scientific literature. For instance, Jacoby et al. (1976), Concas & Kolpakov (2009), Small (2012), and Jara-Díaz & Rosales-Salas (2017) offer valuable overviews on the history and terminology related to the value of time. Although some interesting VoT papers were published already in the 1940s, the first wide-ranging treatment of the value of time was Gary S. Becker's 'A Theory of the Allocation of Time' published in 1965. Becker's paper is still, by far, the most cited VoT paper. Other important, early VoT papers include Beesley (1965), DeSerpa (1971), and Evans (1972)... |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itse19:205189&r=all |
| By: | Luis Miguel Cândido Dias (CeBER and Faculty of Economics, University of Coimbra); Rudolf Vetschera (Faculty of Business, Economics and Statistics, University of Vienna) |
| Abstract: | The Zeuthen-Hicks bargaining model connects strategic and axiomatic bargaining models by providing a description of the behavior of each party,and showing that the entire process leads to the axiomatically founded Nash bargaining solution. In its original formulation, the model treats parties asymmetrically by considering different decision alternatives of the focal party (who can either accept the opponent's offer or make a counteroffer, but not quit the negotiation) and the opponent (who can accept the focal party's offer or quit the negotiation, but not make a counteroffer). We extend the model to consider the full set of possible actions from both sides, which requires explicit modeling of the expectations of the parties concerning outcomes and outside options that become available during the process. We show analytically that under the assumption of concave utilities of both parties, the bargaining process converges to the nonsymmetric Nash bargaining solution. This result provides a new interpretation of the parameters of the nonsymmetric Nash bargaining solution, linking them to behavior in the bargaining process. Furthermore,we perform a simulation study to analyze the outcomes for non-concave utilities. |
| Keywords: | Zeuthen-Hicks bargaining, Nonsymmetric Nash bargaining solution, negotiator confidence. |
| JEL: | C72 C78 C44 C63 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:papers:2019-05&r=all |
| By: | Hernán Bejarano (CIDE, Department of Economics); Brice Corgnet (Emlyon Business School); Joaquín Gómez-Miñambres (Lafayette College, Department of Economics and Economic Science Institute, Chapman University) |
| Abstract: | We extend Akerlof’s (1982) gift-exchange model to the case in which reference wages respond to changes in the work environment such as those related to unemployment benefits or workers’ productivity levels. Our model shows that these changes spur disagreements between workers and employers regarding the value of the reference wage. These disagreements tend to weaken the giftexchange relationship thus reducing production levels and wages. We find support for these predictions in a controlled, yet realistic, workplace environment. Our work also sheds light on several stylized facts regarding employment relationships such as the increased intensity of labor conflicts when economic conditions are unstable. |
| Keywords: | Gift-exchange; Incentives; Self-serving Biases; Reference-dependent Utility; Laboratory Experiments; Labor Conflicts |
| JEL: | C92 D23 M54 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:19-26&r=all |
| By: | Abhinash Borah (Department of Economics, Ashoka University) |
| Abstract: | We revisit, within Harsanyi’s impartial observer setting, the question of foundations underlying procedural fairness concerns in welfare judgments. In our setup—that of allocating an indivisible good using a lottery—such concerns, presumably, matter. We draw from the social preferences literature and relax a typical assumption made while addressing this question, namely, that individuals in society do not care about procedural fairness and such concerns arise exclusively at a societal level, which are captured by non-linear social welfare functions (SWFs). In our model, individual attitudes towards procedural fairness are identified and factored into welfare judgments. Specifically, we provide an axiomatic basis within Harsanyi’s (1955) framework to represent procedural fairness sensitive individual preferences by the representation in Karni and Safra (2002). We then show, in terms of underlying axioms, how such individual assessments incorporating both risk and procedural fairness attitudes can be aggregated by means of utilitarian and generalized utilitarian SWFs. |
| Keywords: | Procedural fairness, Harsanyi’s impartial observer, Karni-Safra (“individual sense of justice†) preferences, social preferences under risk, utilitarianism, generalized utilitarianism |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ash:wpaper:12&r=all |